Tip deduction? Car-loan deduction? Depends on your state

Tax season is here — and with it, changes brought by the big tax and spending bill from last summer. (Yep, the one expected to cost the Treasury $4 trillion over 10 years.) HR-1 will bring a higher standard deduction. Some car loans will be deductible, and many seniors will get a tax break to help offset taxes on Social Security.

But don’t get too excited. A tax break at the federal level doesn’t mean every state is cutting back on taxes.

As part of our ongoing coverage of the 2026 tax season and how changes from HR-1 are impacting everyday Americans, “Marketplace Morning Report” host David Brancaccio spoke with Jared Walczak, senior fellow at the Tax Foundation, about how states are reacting to the updated federal tax code. The following is an edited transcript of their conversation.

David Brancaccio: It's like high school all over again, right? Conformity or nonconformity. Depends on the state you live in, right?

Jared Walczak: It really does. Most states conform in some way to the federal tax code, but they differ in a lot of details, like on things like the standard deduction. There are a lot of points of divergence.

Brancaccio: Alright, so, you're still going to get whatever the federal tax changes have presented to you or wrought. The question is, “Oh boy, I'm also going to save a ton on my state taxes?” It just kind of depends on where you're living?

Walczak: Most states begin with the federal tax code in defining their tax base, but some of them use a previous year version of the Internal Revenue Code, so they're just out of date. Others have a current version, but then it matters what they conform to. So, most states are not automatically in line to bring in the new deductions for tips, overtime, an auto loan interest, or the senior bonus, and that's because of where they're drawn to in the tax code. They're just not in a section that most states bring in.

Brancaccio: Right, and it's not that necessarily states are just slow or bureaucratic or laggards. If states enact some of these tax changes, the state coffers could suffer, and there are, you know, elected officials concerned about that?

Walczak: Absolutely, and these provisions are controversial. Obviously, they're a benefit for some people, but they're somewhat arbitrary. Think about the tips deduction. Most of that benefit does flow to people in the bottom half of the income distribution, so it's progressive in that way, but very few low-income people are tipped workers. If you wanted to provide low-income relief, why would you only apply it to maybe 4% of low-income households? So, for a lot of states, they ask, “Is this worth it? If we were going to provide that relief, couldn't we do it better on our own?” And many aren't going to decide to affirmatively adopt what the federal government adopted.

Brancaccio: And if you're listening, in a conforming state — among them, Colorado, Idaho, Iowa and Montana — this is all pretty academic, because the state tax code is quite aligned with the feds.

Walczak: That's absolutely right. Essentially, those states and a few others begin their own income tax calculations with federal taxable income. Most states begin with adjusted gross income. And the way that the Reconciliation Act, the HR-1 legislation, was designed. These deductions we're talking about, they sit in between AGI and federal taxable income. So, if a state begins its own income tax return with federal taxable income, these are in unless they change their law.