One of the cornerstone pieces of President Donald Trump’s ‘big beautiful bill’ was the elimination of taxes on tips and overtime, but that only applies at the federal level.
With millions of American scrambling to file their 2025 tax returns before Wednesday’s deadline, some state governments are reminding residents that they still have to include tips as part of their taxable income.
Here’s what to know if you still need to file your taxes.
Taxes on Tips
One of Trump’s campaign pledges was to eliminate taxes on tips for American workers, and while those taxes aren’t completely eliminated, there are significant deductions that can be made on returns.
According to the IRS, taxpayers can deduct up to $25,000 in tips if their modified adjusted gross income for tax year 2025 was below $150,000 for single taxpayers, or below $300,000 for those filing jointly.
That deduction can be applied for taxpayers who itemize their deductions, or for those who do not and take the standard deduction instead, according to the IRS.
More information can be found on the IRS’ website.
Taxpayers should be aware however that some payroll taxes can still apply to tips, and that tips are still likely taxed at the state or local level, depending on where they live.
Late last year, the state of Illinois declined to adopt the “no tax on tips” provision of the law, meaning that state residents will still have to pay taxes on those tips.
The state levies a flat income tax of 4.95% on all income, including tips. So while those individuals who are taking advantage of the federal exemption, they’ll still have to pay tax on their tips at the state level.
Several Republicans have filed legislation in an attempt to line Illinois’ policies up with the federal government’s, but those bills have not made progress.
Indiana residents will still have to pay taxes on their tipped income for their 2025 returns, but that will change in 2026 as they align their tax policies with those of the federal government, according to Indiana officials.
Taxes on Overtime
Taxes on overtime pay have also changed with provisions of the bill. Federal officials are cautioning workers that if their overtime pay is impacted by collective bargaining agreements, then they may not be eligible for the deduction, so residents will need to consult with an accountant or a tax preparation service for more information.
For those eligible, overtime pay can also be deducted up to $12,500 per taxpayer, with phaseouts beginning at a modified adjusted gross income of $150,000 for single taxpayers or $300,000 for those filing jointly.
Like the tax on tips, the change is only in effect temporarily.
At the state level, Illinois workers will still be taxed on their income earned via overtime. In Indiana, those filing 2025 tax returns will have to report that income for tax purposes, but their policies will line up with the federal government beginning with tax year 2026, according to officials.
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