Illinois service workers hoping for a financial break from the new federal “no tax on tips” provision are in for a surprise: the state will continue to tax tip income, despite the recent change at the federal level.
The new federal law, enacted in July as part of the One Big Beautiful Bill Act, allows workers in industries such as restaurants, bars, and salons to deduct up to $25,000 of tip income from their federal taxes for the years 2025 through 2028. However, Illinois has rejected the tip tax exemption, joining Maine and the District of Columbia in maintaining state taxes on tips. State officials cite concerns about significant revenue losses if the exemption were adopted.
Policy analysts warn that exemptions like these can complicate tax systems and create inequities between workers in different fields. “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,” explained Manish Bhatt, senior policy analyst with the Tax Foundation. “Illinois does not, so the state is able to exclude the tip exemption from its own tax code.”
This difference could lead to confusion for workers. A server who hears about the “no tax on tips” provision might mistakenly believe their tip income is entirely tax-free, only to discover it must still be reported on their Illinois state tax return.
Tax experts recommend that tipped workers keep thorough records and pay close attention to Illinois-specific rules when filing taxes in 2026. For now, the promise of “no tax on tips” stops at the Illinois border.