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Washington, D.C., passed an emergency bill this month axing key tax benefits included in President Donald Trump’s One Big Beautiful Bill Act.
Experts say the move highlights why Americans should pay attention to state tax laws, as opposed to just federal codes.
D.C. isn’t the only jurisdiction to decouple its state tax code from Trump’s recent changes, however. Illinois is another example. Here’s what we know.
Can states choose to not implement federal tax laws?
States aren’t required to conform with all federal tax provisions.
With COVID-era federal aid depleted, the economy uncertain, and states on the hunt for money, many states may look to shore up budgets by decoupling from federal tax laws.
“The District of Columbia is not alone in assessing the costs of OBBBA conformity, with lawmakers across the country evaluating the trade-offs associated with adopting or decoupling from key provisions of the reconciliation act,” the Tax Foundation, a nonprofit research organization, wrote.
Illinois decouples from federal tax code
Illinois is one of several states that have suspended tax provisions included in the bill in an attempt to protect their state budget.
More specifically, the state hasn’t adopted the no tax on overtime and tips provisions, according to USA TODAY.
Illinois will probably also update Schedule M to require add-backs for federally exempt tip and overtime income, the outlet reported.
Which states have cut federal tax benefits
Trump’s mega tax package “is causing havoc on state budgets as many conform to the Internal Revenue Code, and these states are seeing big drops in forecasted revenue,” Richard Pon, a San Francisco-based certified public accountant, told USA TODAY.
Other states that have moved to protect their budgets include:
- Washington, D.C.: Voted to temporarily suspend higher basic standard deductions, charitable contribution for non-itemizers, qualified small business stock exclusion, no tax on tips and overtime, personal car loan interest deduction and bonus $6,000 senior tax deduction.
- Colorado: Rejected no tax on overtime pay. It will add a line to its state tax form for “Excess federal deduction for overtime pay.” Taxpayers must report the amount deducted federally and add it back for state purposes.
- New York: Will continue taxing tips and overtime pay by adding new codes for “Add-back of exempt tip income” and “Add-back of exempt overtime pay” on its IT-225 form.
- Maine: Rejected the bonus senior deduction and deductions for car loan interest, tips and overtime.
“You must pay close attention to state adjustments for the next few years, as each state’s approach differs,” said Eric Clements, director of Tax Compliance at Thomson Reuters. “This complexity makes DIY tax preparation less viable for affected clients.”
Jim Sergent, Janet Loehrke, Ken Alltucker and Kayla Jimenez contributed to this article.
