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Tax season is approaching with significant changes on the horizon for Americans who earn tips or overtime income. A new federal law will exempt these earnings from federal taxes, though New York State currently plans to continue taxing them.
For Cheryl Wright, a veteran server at Jines Restaurant on Park Avenue in Rochester who has worked there for 11 years, the news brings mixed emotions. Wright estimates that tips constitute approximately 90% of her annual income, totaling between $45,000 and $50,000 per year.
“I think it’s nice to know, especially with prices still being high. I mean, cost of living…” Wright said, expressing relief about the federal tax exemption.
The federal legislation, which takes effect for the 2025 tax year, allows workers to deduct up to $25,000 in tip income and up to $12,500 in overtime pay from their federal taxable income. While employers will continue to withhold these taxes as usual, workers will be able to claim the exemption when filing their returns.
However, a significant caveat exists for New York residents. The state has not yet indicated it will conform to the federal changes, making it one of several states that plan to continue collecting state income tax on tips and overtime earnings.
Two bills have been introduced in the New York State Legislature that would establish state income tax deductions for cash tips and overtime wages, mirroring the federal approach. State Senator George Borrello, a co-sponsor of both bills, strongly supports these measures.
“This would be a step in the right direction when it comes to affordability,” Senator Borrello said. “I can’t think of any bill that we’ve seen this year that’s more supportive of the working class and certainly people in the middle income area than these two bills that would exempt taxes from tips and overtime.”
Despite the senator’s enthusiasm, neither bill has advanced beyond the committee stage to receive a full vote. Governor Kathy Hochul has remained noncommittal on the issue. When contacted for comment, a spokesperson for the governor stated: “The governor will review the legislation if it is passed by both houses of the legislature.”
The financial implications for New York State are substantial. While the Department of Taxation and Finance indicated they don’t separately track revenue from tips and overtime taxation, an analysis by the Institute on Taxation and Economic Policy estimates the potential cost to state coffers at approximately $844 million if New York were to adopt similar exemptions.
For service industry workers like Wright, the federal exemption represents meaningful relief, though the state tax burden remains. Rather than viewing the tax savings as discretionary income, Wright plans to apply it toward everyday necessities.
“I don’t think I’m going to be able to invest or spend it willy-nilly. It’s going to go to groceries, go to pay bills, go to gas and, you know, take care of things,” she explained.
The divergence between federal and state tax policy creates a complex situation for New York’s tipped and overtime workers. While they’ll see relief on their federal returns starting in 2025, without legislative action in Albany, their state tax obligations will remain unchanged.
The situation highlights the often disconnected nature of federal and state tax policies, with states having the authority to determine whether they conform to federal tax changes. For service industry employees and others who rely heavily on tips or overtime compensation, the distinction will become increasingly important as the 2025 tax year approaches.
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8 Comments
This is an important update for workers relying on tips and overtime. The federal tax exemption could provide meaningful financial support, but the lack of alignment with New York is concerning. I wonder if this will spur other states to reconsider their own policies in this area.
The federal tax exemption on tips and overtime is an encouraging development, but the lack of alignment with New York state policy is concerning. Workers in that state may end up facing a confusing patchwork of rules. I hope to see more states follow the federal government’s lead to provide consistent relief across the country.
You make a good point. The discrepancy between federal and state policies could create unnecessary complexity and headaches for workers. Consistency would be ideal to maximize the intended benefits of this tax relief.
The tax exemption on tips and overtime seems like a positive step to help support workers. However, the lack of alignment between federal and state policies in New York could create additional complexity. I’m curious to see how this plays out and if other states decide to conform to the federal changes.
The federal tax relief on tips and overtime is a welcome development, but the fact that New York isn’t following suit is a bit disappointing. Workers in that state may end up in a confusing situation trying to navigate the differences. Hopefully more states will choose to align with the federal approach to provide consistent benefits.
This is an interesting development for workers who rely heavily on tips and overtime. The federal tax relief could provide some much-needed financial breathing room, especially with the high cost of living. It will be important to see if New York follows suit or if residents there will face a discrepancy between state and federal taxes.
This federal tax relief is certainly welcome news for workers earning tips and overtime income. With the cost of living remaining high, any tax savings could make a meaningful difference. It will be interesting to monitor how states like New York respond and whether they choose to align with the federal approach.
While the federal tax exemption on tips and overtime is a positive step, the lack of coordination with New York state policy is problematic. Workers in that state could face an unnecessarily complex situation. I hope to see more states adopt similar measures to provide clear and uniform tax relief for these types of earnings.