Nearly two months after Republicans’ massive tax and spending bill was signed into law, state policymakers are beginning to work out how “no tax on tips” and other U.S. tax code sweeteners will play out on state returns. The answers vary by locale, leaving some states bracing for the budgetary fallout.

Taxpayers in South Carolina, Iowa and at least four other states will be able to deduct tips on their state returns. Idaho and North Dakota are among the states that will match the new $6,000 “senior bonus.” And 18 states will quadruple their state and local tax (SALT) deduction to match the higher federal cap. More states could follow as legislatures return from summer breaks and begin integrating components of the $3.4 trillion legislative package known as the One Big Beautiful Bill into their respective tax codes.

But the new tax breaks included in President Donald Trump’s signature bill, combined with the legislation’s cuts to Medicaid and food assistance programs, have significant implications for some state coffers. In Colorado, where state law requires matching most federal tax breaks, legislators are convening a special session this week to address the $750 million shortfall projected because of the changes.

Here is a rundown of how some of the changes to the federal tax code might play out in your state.

A bigger standard deduction

The state-level effects come down to two key questions: How closely the state’s tax code aligns with federal law, and whether the state calculates taxes based on adjusted gross income or on what the federal government considers taxable income.

On the first question, Jared Walczak, vice president of state projects at the Tax Foundation, said 20 states and D.C. automatically link their tax codes to federal law when it comes to individual income taxes. (Business taxes are handled differently in some states.) Another 10 states match federal rules as of 2024, meaning state lawmakers would have to vote to incorporate the new law; many of those states will probably do so.
Seven states match federal law from past years; California, for instance, still mostly follows 2015 standards. Four other states aren’t tied as closely to federal law, and nine states don’t have income taxes.

The 20 states tethered to the federal tax code will adopt the larger standard deduction — $15,750 for individuals and $31,500 for married couples, which should save many taxpayers some money on their state tax bills.

Breaks for seniors, tipped workers and more

Of the states that mirror national tax law, only a few will pass on all of the new federal tax breaks to state returns. That’s based on how the state calculates taxes. Most states start with the taxpayer’s adjusted gross income (annual earnings minus certain subtractions, like the student loan interest deduction) to calculate the tax. But seven states base their formulas on the person’s federal taxable income instead.

The Republican-led law allows filers to reduce their taxable income by subtracting certain tips, overtime pay and car loan interest, plus as much as $1,000 of charitable contributions — even for people who don’t itemize. So those seven states will recognize some of those subtractions on state returns.
Here are the states where each of the federal policies will apply to state taxes, under preexisting state laws, according to Walczak’s analysis.

Costly cuts

Other states might adopt these politically popular deductions eventually, but they can be expensive. Here’s what the Tax Foundation estimates it would cost each state to adopt four deductions — the $6,000 bonus deduction for senior citizens, overtime, tips and car loan interest — from their state taxes. In states that don’t have income taxes, of course, it wouldn’t cost anything.

The federal legislation has much bigger ramifications for state budgets. Cuts to Medicaid and food stamp benefits were designed to reduce the amount of money the federal government gives to states to fund those programs. That’s a major concern for some states. New York, for example, predicts a $3 billion drop in tax revenue. The governor of New Mexico has said a special session “may be necessary” to assess the financial impact.

SALT deductions

In 2017, congressional Republicans capped the amount of state and federal taxes that individuals could deduct from their federal taxable income at $10,000, a money-saving move that was unpopular in high-tax states like New York and New Jersey, and in the District. Trump’s tax bill raised that cap to $40,000 for all but the highest earners — a change that at least 18 states will copy, according to the Tax Foundation, allowing people with very high property taxes to deduct more from both their state and federal returns.

Note that many of the states most affected by the SALT cap are not among the 18 states matching the federal cap. New Jersey, for instance, will keep its $15,000 cap. Some high-tax states, like New York and California, have never imposed any cap on deductions of property taxes on their state returns. In the case of Pennsylvania, it’s the opposite: They don’t allow any SALT deductions at all.

Originally published in The Washington Post By Julie Zauzmer Weil https://www.washingtonpost.com/business/2025/08/22/state-taxes-trump-big-beautiful-bill/