No Tax on Tips in Illinois

Why Illinois still taxes your tips

The four OBBBA deductions are below the line. They reduce federal taxable income — Schedule 1-A totals onto Form 1040 line 13b — and they never reduce federal adjusted gross income. Illinois begins its own calculation from federal agi, which the deduction never touched.

So nothing was decoupled and no vote was held. Illinois simply carried on taxing tips the way it always had, because from the state's point of view nothing about your income changed. This is the position most American workers are in, and it is the part of "no tax on tips" that the name obscures.

Illinois charges a flat 4.95% on wage income. On the $14,000 in the example above, the state still takes about $693 — an effective 4.95% on that income, on top of the Social Security and Medicare that no state or federal provision removes.

What $14,000 of tips is actually worth in Illinois

Take a single filer with $32,000 of other wages and $14,000 of tips — the defaults loaded in the calculator above. Federal taxable income falls by the full $14,000, worth $1,680 at this filer's bracket.

Illinois taxable income does not move at all, so the state still collects about $693 on that money. Add $1,071 of Social Security and Medicare, which no OBBBA provision reduces, and the total tax on your $14,000 falls from about $3,444 to about $1,764.

Move the sliders to your own numbers and the arithmetic follows. The two things that will not change are Illinois's treatment — the state taxes this money regardless of what your federal return says and the payroll tax, which applies to the first dollar and the last.

What tips tax relief does not do, in Illinois or anywhere

Your tips are still wages. They stay in boxes 1, 3 and 5 of your W-2 — the box 12 code TP is informational — so Social Security and Medicare are computed on exactly the same amount as before, and your employer's withholding does not change because of this deduction.

Only tips in one of the 81 occupations Treasury has published qualify, and only genuinely voluntary tips: an automatic gratuity on a large party is a service charge, which is a wage rather than a tip and is not deductible. The deduction is capped at $25,000 per return and phases out above $150,000 of MAGI ($300,000 filing jointly).

And all four OBBBA deductions expire after tax year 2028. Whatever Illinois does between now and then, the federal provision has a fixed end date.

Frequently asked questions