Why does a below-the-line federal deduction not reach the state?

States that start from federal AGI pick up income before Schedule 1-A is applied, so the deduction has to be adopted separately.

Comparison · Schedule 1-A at the state level

States that tax tips and overtime anyway

The federal deductions are taken after AGI, and most states start from federal AGI or their own income definition. So a client can owe state tax on tips the IRS no longer taxes.

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Comparison · Schedule 1-A at the state level

States listed

10 verified

Federal form: Schedule 1-A
Usual state result: No deduction
Exception found: Oregon (2025)

Applies: Tax year 2025From IRS.gov · checked October 10, 2026

State by state

Only states whose revenue department published a position are listed.

Oregon: clients may be able to claim the same tips, overtime and vehicle loan interest deductions on 2025 returns (OR-17).
Nebraska: no automatic effect, because the deductions sit below federal AGI.
Utah: no effect on the Utah return, for the same reason.
New Jersey: no effect, because the Gross Income Tax does not start from federal AGI.
North Carolina: does not conform to the Schedule 1-A deductions.
Rhode Island: does not allow the tips, overtime or vehicle loan deductions.
Wisconsin: has not adopted the tips, overtime, car loan or senior deductions.
District of Columbia: does not recognize any of the Schedule 1-A deductions.
South Carolina: had not considered the changes as of March 2026; taxpayers must adjust.
Pennsylvania: tips remain taxable compensation.

How to explain it to clients

Clients will expect their tips to be tax-free everywhere. Put a line in the engagement letter or organizer that the deduction is federal only in most states, so the state balance due is not a surprise.

FAQ

Frequently asked questions

Why does a below-the-line federal deduction not reach the state?: States that start from federal AGI pick up income before Schedule 1-A is applied, so the deduction has to be adopted separately.

Keep exploring

US tax changes for 2025 and 2026

The plain-English summary for business owners

The no tax on tips deduction, for tax preparers

Schedule 1-A · qualified tips

The qualified overtime deduction: only the premium counts

Schedule 1-A · qualified overtime

Schedule 1-A: the new home for four deductions

New form · tax year 2025 onward

Sources

General information for tax professionals, not advice on a specific return. Figures are from IRS.gov on the date shown; check the current IRS instructions before filing.

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