OBBBA tips & overtime guide › State tax treatment
Your staff have almost certainly asked you some version of this: "If tips aren't taxed now, why did my check not change, and does the state still take its cut?" Most answers you will find online — including, until today, four places on this site — resolve to "state treatment varies, check with your state." That is true and useless. It is also skipping a structural fact that answers most of the question before any state is named.
Here is the fact. The two OBBBA deductions are not exclusions from wages and they are not adjustments to income. They are subtracted after adjusted gross income has already been computed. Almost every state income tax in the country begins its own calculation at one of two federal numbers, and which one your state picked determines whether these deductions are even in the room.
The one-line version: IRC §§ 224 and 225 are printed in the U.S. Code under the heading "PART VII—ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS," and § 63(b) lets non-itemizers claim them by subtracting them from adjusted gross income to reach taxable income. Adjusted gross income is unchanged by either deduction. So a state return that starts at federal AGI never encounters them; a state return that starts at federal taxable income inherits them automatically, and has to pass a law if it wants to keep taxing that money. Colorado did exactly that. Idaho went the other way and built a worksheet.
This is worth five paragraphs because nearly every practical consequence follows from it, and because the placement is easy to get backwards — a deduction "you can take without itemizing" sounds like an above-the-line adjustment, and it is not one.
Open 26 U.S.C. § 224 and read the breadcrumb the Office of the Law Revision Counsel prints above the section text:
Subtitle A—Income Taxes · CHAPTER 1—NORMAL TAXES AND SURTAXES · Subchapter B—Computation of Taxable Income · PART VII—ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS · § 224
Section 225, qualified overtime compensation, carries the identical breadcrumb. Both were added by Pub. L. 119–21 on July 4, 2025 — § 70201(a) and § 70202(a) respectively — and both are Part VII deductions, the same part of the Code that holds the ordinary itemized deductions.
What makes them available to the roughly nine in ten filers who do not itemize is a separate move, made in § 63(b). That subsection defines taxable income for a non-itemizer as adjusted gross income, minus a short enumerated list — which now includes "the deduction provided in section 224" and "the deduction provided in section 225." The deductions were not relocated into § 62's list of adjustments that produce AGI. They were added to the list of things you subtract once AGI already exists.
There is a tell inside the statutes themselves that confirms this is deliberate rather than drafting accident. Both sections phase out above modified adjusted gross income of $150,000 ($300,000 joint), reducing the deduction by $100 for every $1,000 over the line, and both define MAGI as "the adjusted gross income of the taxpayer for the taxable year increased by" the § 911, § 931 and § 933 exclusions. A deduction that reduced AGI would reduce its own phase-out measure and partially undo its own limitation. These do not, because they sit below the line they are measured against.
Why this catches people out. "Available to non-itemizers" and "above-the-line" describe two different things, and in ordinary conversation they have collapsed into one. The educator expense deduction and the HSA deduction are above-the-line: they reduce AGI. The tips and overtime deductions are not: they reduce taxable income only. Every downstream number that is computed from AGI — and a state tax base is very often exactly that — behaves as though the deductions do not exist.
State individual income taxes overwhelmingly borrow a federal number as their own starting point rather than defining income from scratch. The two common choices produce opposite results here.
| If your state return begins at… | What happens to the §224/§225 deductions | What the state has to do to change that |
|---|---|---|
| Federal adjusted gross income | They are not in the number. AGI is computed before either deduction is applied, so the tips and overtime are still fully inside the state's base. | Enact its own subtraction or exemption. Doing nothing means the state keeps taxing tips and overtime exactly as before. |
| Federal taxable income | They are already baked in. Taxable income is AGI minus these deductions, so the state inherits the federal benefit by default. | Enact an addback. Doing nothing means the state loses the revenue automatically. |
Note the asymmetry, because it explains the news coverage you may have seen. In an AGI state, inaction is the status quo and nobody has to do anything. In a taxable-income state, inaction is a tax cut the legislature never voted for — which is why the states that moved first and loudest on this were disproportionately taxable-income states with rolling conformity to the Internal Revenue Code.
Colorado states its own starting point plainly in the Department of Revenue's Individual Income Tax Guide: "Colorado income tax is based generally on federal taxable income, although various modifications and adjustments are made in the calculation of Colorado income tax."
That is the second row of the table above, so both deductions flowed into the Colorado base on their own. The same guide records what Colorado then did about it, under its own heading, "Overtime compensation deduction addback":
"For tax years 2026 and later, an individual who claims a deduction for overtime compensation on their federal income tax return must add back the amount of the deduction on their Colorado return. The addback is required for the full amount of the federal deduction claimed on the taxpayer's IRS Schedule 1-A (Form 1040)."
And, in the very next line: "No addback is required on the taxpayer's Colorado return for any deduction claimed on their federal return for qualified tips."
So in Colorado the two halves of "no tax on tips and overtime" now diverge at the state line: the tip deduction carries through to the Colorado return, the overtime deduction is added straight back. An employee of yours with both kinds of income gets a different answer for each, on the same return, in the same year.
Further down, the same guide addresses withholding — and this is the sentence to take to whoever configures your payroll system:
"Colorado income tax withholding is generally required with respect to any compensation that is subject to federal income tax withholding. Additionally, overtime compensation is subject to Colorado withholding even if it is exempt from federal withholding."
Read that carefully. Colorado is anticipating a case where federal withholding on overtime has been reduced and is pre-emptively severing its own withholding from that outcome. Whatever happens on the federal side of your withholding configuration, the Colorado side is a separate switch and does not follow it. Tips are listed separately in the same guide among the compensation subject to Colorado wage withholding.
Idaho did not add anything back. The Idaho State Tax Commission publishes Idaho Worksheet 1-A, "Federal Schedule 1-A Deductions" (form EFO00341, revision 03-02-2026), and its structure is the clearest available evidence of how a state can give effect to these deductions:
A state that intended to ignore these deductions would not build a worksheet to apportion them. The worksheet also shows what "the state benefit" concretely means for a multi-state employee: it is the federal deduction scaled by the share of the underlying tips or overtime that was earned in Idaho — not the whole federal number, and not zero.
New York begins somewhere else. The Department of Taxation and Finance's instructions for Form IT-201, the full-year resident return, define the base this way: "Your New York adjusted gross income is your federal adjusted gross income after certain New York additions and New York subtractions (modifications)," with federal AGI carried to line 19 of the return.
This next step is our reading, not a New York statement. We did not find a New York publication addressing the OBBBA tips or overtime deductions specifically, and we are not asserting one exists. But the two verified premises point one way: if the New York base is federal AGI, and § 63(b) applies the §224/§225 deductions only in the step after AGI, then the deductions do not enter the New York computation on their own, and no addback would be needed to produce that result. Anyone in an AGI state should confirm the current position with the state's own materials rather than with this page.
Conformity and flow-through are two different mechanisms, and a great deal of published commentary runs them together — which is how you end up reading that a state "conformed to OBBBA" and concluding that your employees' tips are now exempt there.
Both have to line up. Rolling conformity plus a taxable-income starting line is what put Colorado in the position of needing an addback. Perfect conformity plus an AGI starting line changes nothing by itself.
Three things are federal and are the same in all fifty states, and they are the three most common sources of confusion on the floor:
This is a better use of your time than any third-party table, including ours, because you will be reading the document that actually governs:
A fifty-state table. We can build one; we are not willing to publish one we have not read state by state. Several fifty-state "tips and overtime conformity" tables are circulating, and when we tried to corroborate specific claims from one of them against the states' own publications this week, we could not — the Georgia Department of Revenue's own federal-conformity page has no OBBBA entry at all, and the Georgia notice the search results pointed at turned out to concern net operating loss forms and nonresident withholding, nothing to do with tips or overtime. That does not prove the table wrong. It does mean we could not verify it, so it is not repeated here. Colorado, Idaho and New York appear above because we read the states' own documents, and those three are enough to demonstrate the mechanism.
Colorado's statutory citation. We quote the Department of Revenue's published guide, which is what a Colorado employer would actually be handed. We did not read the underlying session law, so we do not cite a bill number.
Any claim about your state's position. Forty-seven states are not discussed on this page. Their absence means we did not check them, not that nothing has happened there.
The state question is downstream of a number you have to get right anyway. Whether your state adds it back, subtracts it, or never sees it, the qualified-tip and qualified-overtime-premium totals on each employee's W-2 are the same federal figures — and they have to be accumulated through the year, not reconstructed in January. TipLedger keeps that running split from POS tip data and timeclock overtime.
See how TipLedger tracks it →