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By Aliss Higham
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A sweeping federal package signed on July 4 promised tax relief and new deductions for many Americans, but several states and the District of Columbia have moved quickly to opt out of some of those changes, meaning millions who will get breaks on their federal returns may see no benefit on their state filings.
Why It Matters
The One Big Beautiful Bill (OBBBA) introduced an array of tax changes affecting seniors, service workers, car buyers and others. Among the headline items are an expanded deduction for senior Americans, a change that lets service workers who earn less than $150,000 a year exclude up to $25,000 of tip income from federal taxes, and an exemption from federal taxation for up to 250 hours of overtime pay. The law also allows car buyers making less than $100,000 annually to deduct interest on auto loans up to $10,000.
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But state tax codes don’t automatically mirror federal law. Most states start from the Internal Revenue Code as a baseline, yet they differ widely in how and when they choose to conform. Some follow the current federal code automatically; others tie their laws to an earlier version of the code and therefore may never pick up newly enacted federal provisions unless they take separate action.
What To Know
Several states and Washington, D.C., which typically conform at least in part to federal rules, have taken legislative action to avoid replicating key OBBBA provisions on their own tax returns (at least for now), citing concerns about budget impacts and administrative complexity.
D.C. moved first to temporarily block multiple provisions, making its action retroactive to January 1, 2025. D.C.’s emergency amendment suspends the higher basic standard deductions, the charitable contribution for non-itemizers, the qualified small business stock exclusion, the no-tax-on-tips provision, the no-tax-on-overtime-pay provision, the personal car loan interest deduction, and a bonus $6,000 senior tax deduction.
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The council’s emergency step applies for 90 days with a planned temporary extension of 225 days; enacting any measure permanently would require navigating the longer regular legislative process of debate and additional votes.
“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.
Other states have taken their own steps to prevent the new federal tax breaks from cutting into their budgets. Colorado has rejected the federal rule that removes taxes on overtime pay, meaning residents will still owe state tax on those earnings.
New York will also continue taxing tips and overtime, regardless of the new federal exemptions. Illinois is taking a similar approach and is expected to require residents to count tips and overtime income as taxable at the state level. Maine has gone even further, declining to offer the extra senior deduction or the new breaks for car loan interest, tips, and overtime.
What Happens Next
The result: taxpayers in these states who claimed new federal deductions this year may find their state tax bills remain unchanged because the states disallow duplicating the federal breaks.
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