New forms, updates, and headaches as a result of OBBBA. Learn how states will administer “No Tax on Tips & Overtime.”
Passing a law is just the beginning. The real work starts when tax agencies and professionals like you must implement those changes on the ground. As states finalize their positions on the One Big Beautiful Bill Act (OBBBA)’s “No Tax on Tips” and “No Tax on Overtime” provisions, we’re entering the practical phase where policy becomes process.
This creates both challenges and opportunities for your practice. Whether your state embraced or decoupled from OBBBA, you’ll need to navigate new forms, updated systems, and evolving processes for the 2025–2028 period. Understanding these implementation details helps you serve clients more effectively.
response—how state legislatures decide whether to conform to the most well known of OBBBA’s provisions for “No Tax on Tips” and “No Tax on Overtime”, and what those choices mean for taxpayers and practitioners.
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Tax forms and instructions: What changes for OBBBA?
The administrative reality of OBBBA varies significantly based on your state’s conformity approach, directly impacting your daily workflow and client interactions.
Conforming states
If your state fully conforms to OBBBA and uses federal taxable income as the starting point, you’ll find the process refreshingly straightforward. The deduction flows through automatically. No new form lines are needed.
For example, Montana’s Form 2 for 2025 will simply pick up the lower taxable income from the federal 1040. Some states may add a note in their instructions to clarify this difference, but your compliance burden remains minimal.
AGI-based conforming states
States that start from federal AGI and choose to adopt the deductions (like North Carolina, if pending legislation passes) will need to create a state subtraction for those amounts.
This means you’ll likely see new lines on state returns or schedules. Additions to your workflow that require attention but maintain logical consistency with federal treatment.
Decoupling states
Here’s where your expertise becomes crucial. States that deny the deductions must require an addition on the state return for the amount deducted federally. This creates the compliance complexity that makes your services invaluable:
Colorado: Will add a line for “Excess federal deduction for overtime pay.” Taxpayers must report the amount deducted federally and add it back for state purposes.
New York: Will likely add new codes for “Add-back of exempt tip income” and “Add-back of exempt overtime pay” on its IT-225 form.
Illinois: Will update Schedule M to require add-backs for federally exempt tip and overtime income.
States may combine or separate lines for tips and overtime, depending on their legislative approach. This variation means you’ll need state-specific knowledge to serve clients effectively.
Withholding and W-2 reporting
For 2025, the IRS didn’t change withholding tables or the W-2 format mid-year, which means employers continue withholding as usual. Refunds will result if income is later excluded. However, 2026 brings significant changes you should prepare for.
The IRS plans to add new codes or boxes on the W-2 to identify exempt tips and overtime, which will aid both you and your clients in accurate reporting. States conforming to the deductions may update their withholding guidelines to mirror the IRS, while decoupling states will instruct employers to continue withholding as before.
Communication with employer clients becomes critical to avoid under- or over-withholding, especially as federal and state rules diverge. This presents an opportunity to expand your advisory services.
Technology updates: E-filing and software
The IRS e-file schema for 2025 incorporates new deduction fields, which creates both opportunities and challenges for your practice. Conforming states may use the lower federal taxable income seamlessly, while decoupling states will require the breakdown of deductions.
Your action items:
Always update your software after legislative sessions, as late changes may require patches
Tax software will prompt you for necessary inputs and automatically populate state forms where needed
Monitor software provider communications for state-specific updates
This technological evolution reinforces the value of professional preparation services. Your clients can’t navigate these complexities alone.
Administrative OBBBA challenges that impact your tax firm
Several operational issues will directly affect how you serve clients:
Eligibility definitions: The IRS will define “qualified tip income” and “qualified overtime pay.” States generally follow federal definitions to avoid confusion, but you’ll need to stay current on these specifications to ensure accurate compliance.
Phaseouts and caps: The federal deduction phases out at higher incomes; states are expected to follow the same thresholds. This creates planning opportunities for high-income clients who might benefit from income timing strategies.
Retroactive changes: If a state changes its stance after returns are filed, amended returns may be needed. Your proactive monitoring of legislative developments becomes a competitive advantage—clients depend on you to anticipate and manage these changes.
Audit and compliance: States will rely on federal data and new W-2 codes for verification. Expect increased scrutiny and possible state guidance on documentation. Your documentation and record-keeping advice becomes more valuable in this environment.
What these OBBBA tax changes mean for taxpayers and preparers
More complex state calculations: You must pay close attention to state adjustments for the next few years, as each state’s approach differs. This complexity makes DIY tax preparation less viable for affected clients.
Client communication: Be ready to explain why a federal benefit may not apply at the state level, or why a client’s refund is larger or smaller than expected.
Planning: Incorporate state differences into tax planning and estimated payments. Watch for legislative changes that could require amended returns. This positions you as the strategic advisor, not just the compliance preparer.
Training: Ensure your staff are up to speed on these changes. Use cheat sheets or software diagnostics to reduce errors. Your team’s expertise in navigating these complexities becomes a key differentiator.
Example client scenarios
Understanding the following practical examples will help you communicate effectively with clients.
Conforming state example: Alice in Iowa deducts all her tips federally and for Iowa, resulting in a larger refund due to over-withholding. Your advice: “You’ll see the benefit at both levels—let’s adjust your withholding to optimize cash flow.”
Decoupling state example: Bob in New York must add back his federal overtime deduction on his NY return, so he sees no state tax benefit. Your advice: “While you save federally, New York requires us to add this back. This affects your estimated payments and planning.”
Partial conformity example: Carlos in Colorado deducts tips but must add back overtime, reflecting the state’s hybrid approach. Your advice: “Colorado chose a middle path—you benefit on tips but not overtime. This creates unique planning opportunities.”
Tax planning for 2029 and beyond
OBBBA’s provisions sunset after 2028, which creates both challenges and opportunities for long-term planning. States that conformed will revert to taxing tips and overtime unless they enact their own exemptions. Watch for possible expansions or permanent changes if these policies prove popular.
This timeline means your expertise in navigating temporary provisions becomes valuable for clients making multi-year financial decisions. Position yourself as the advisor who helps clients optimize benefits while preparing for eventual changes.
Your strategic action plan for OBBBA tax law changes
Stay informed: Monitor state guidance, legislative updates, and software bulletins. Your proactive intelligence gathering becomes a service differentiator.
Communicate proactively: Educate clients about state-specific differences and prepare them for possible changes. Clear communication builds trust and demonstrates professional value.
Be flexible: Be ready to amend returns or adjust planning as laws evolve. Your adaptability and expertise in managing change become competitive advantages.
Leverage complexity: These implementation challenges create opportunities to demonstrate professional value. Clients need guidance navigating this evolving landscape—position yourself as their trusted guide.
By mastering these implementation details, you ensure accurate returns and provide invaluable advice to clients navigating this evolving tax landscape. Your expertise in managing the practical complexities of tax law implementation becomes more valuable as the regulatory environment grows more complex.
Get the latest on OBBBA news in our OBBBA resource hub and listen to Thomson Reuters’ Clarity podcast for more tax and accounting updates.
