I'll Bet They Did: Il Rejects Federal ‘No Tax on Tips’ Rule, Keeps State Tax on Tipped Income

Illinois is not adopting the new federal “no tax on tips” provision, meaning tipped workers in the state will still owe Illinois income tax on tips, even when those tips are exempt at the federal level.

Manish Bhatt, senior policy analyst with the Tax Foundation, said Illinois’ tax structure makes it possible for the state to decline the new tip exemption.

“Only those states that begin state-level income tax calculations using the federal definition of taxable income have it automatically incorporated into the tax code,” Bhatt explained. “I don't believe Illinois does that. So I think the states are certainly able to not incorporate that individual sort of exemption on tips and overtime wages.”

Even for states that do automatically conform to federal tax changes, Bhatt said it may be wiser to “decouple” from the federal rule.

“It’s much more sound tax policy to not create carve-outs for certain taxpayers at the expense of others,” he said. “More general reform certainly needs to happen to bring the tax burden down for everybody.”