SPRINGFIELD, Ill. — Illinois will not participate in the new federal “no tax on tips” provision, leaving tipped workers responsible for paying state income tax on their gratuities even as those earnings become exempt at the federal level. Tax analysts say the decision stems from Illinois’ tax code, which does not automatically conform to federal definitions of taxable income.
Manish Bhatt, senior policy analyst at the Tax Foundation, said only states using federal taxable income as their starting point automatically adopt the new federal exemption. Illinois, he noted, does not, allowing lawmakers to decline the change. Bhatt added that even states that do conform may choose to “decouple,” arguing that selective carve-outs create inequities across taxpayers.
Bhatt warned that workers hearing about federal relief may mistakenly assume the exemption applies to their state filing. That confusion, he said, could lead to filing errors or force some residents to pay for tax preparation services they previously handled on their own.
Illinois maintains some of the country’s highest property tax burdens, adding to frustration among workers who may feel the state should mirror federal relief. Bhatt acknowledged the political tension but argued that broad-based tax reform—not industry-specific exemptions—offers more stability and fairness.
He cautioned that special exemptions could distort the labor market by encouraging employers to shift workers into tip-eligible roles to secure lower tax obligations, potentially reshaping compensation structures across industries.
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Sources:
• The Center Square – MBFC Rating
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