Does Illinois Tax Tips in 2026? The Schedule M Addback

Note: This article describes the Schedule M addback based on reporting of IDOR guidance. We are confirming the mechanism directly with IDOR. If the OBBBA tips deduction is below-the-line (does not affect federal AGI), and Illinois starts from federal AGI, the addback mechanics may differ from what is described here. This note will be updated once IDOR's Schedule M instructions are confirmed.

When Congress passed the One Big Beautiful Bill Act in 2025, tipped workers across the country got a new above-the-line deduction worth up to $25,000 per year on their federal return. But in Illinois, that deduction runs into a wall called Schedule M. The Illinois Department of Revenue has confirmed that the federal OBBBA tips deduction must be added back on Schedule M, meaning Illinoiswill continue to tax every dollar of tip income at its flat 5.0% rate.

The short answer to whether Illinois taxes tips in 2026: yes, fully, at 5.0%, with no state-level equivalent of the federal deduction.

What is the Schedule M addback?

Illinois begins its income tax calculation with federal adjusted gross income (AGI). Because the OBBBA tips deduction is above the line, it has already reduced your federal AGI by the time Illinois sees it. Schedule M is the form where Illinois adds back federal deductions it does not recognize, restoring those amounts to your Illinoistaxable base.

This is not new. Illinois has used Schedule M for years to handle differences between federal and state tax law. What is new is that the OBBBA tips deduction has been explicitly added to the list of items that must be restored. The same applies to the federal overtime deduction (up to $12,500 for single filers).

After the addback, Illinois applies its own personal exemption of $2,925(for single filers in 2026) and then taxes the result at the flat 5.0% rate. There is no state-level deduction that replaces the federal one.

Federal deduction vs. Illinois addback

The federal tips deduction is valuable regardless of where you live. If you work in a customarily tipped occupation and earn under the MAGI phase-out threshold ($150,000 single, $300,000 married filing jointly), you can deduct up to $25,000 of qualified tips from your federal taxable income. That reduces your federal income tax, potentially by thousands of dollars.

The Illinois addback does not take away the federal savings. It simply meansIllinois does not give you a matching deduction at the state level. You pay federal tax on your income minus tips; you pay Illinois tax on your income including tips.

Because Illinois uses a flat rate, the math is straightforward. Every dollar of tips that gets added back on Schedule M costs you exactly 5.0% in Illinois income tax. There are no bracket interactions or marginal-rate surprises.

Worked example: server earning $60K

Consider Rosa, a single filer who works as a server in Chicago. She earns $45,000 in base wages and $15,000 in qualified tips during 2026, for a total of $60,000. Her MAGI is well below the $150,000 phase-out threshold, so she qualifies for the full deduction.

Without the addback, Rosa's Illinois taxable income would have been $42,075, and her state tax would have been $2,083. The addback costs her $743 in additional Illinois tax. That is the price of non-conformity for a worker with $15,000 in tips.

If Rosa had the full $25,000 in tips, the addback cost would be $1,238. Still, her federal savings from the tips deduction far exceed the Illinois addback cost, so the deduction remains a net positive.

Overtime gets the same treatment

Illinois's non-conformity is not limited to tips. The federal OBBBA overtime deduction (up to $12,500 for single filers, $25,000 for married filing jointly) is also added back on Schedule M. If you earn both tips and overtime, both addbacks apply separately.

For a worker who claims the full tips deduction ($25,000) and the full overtime deduction ($12,500), the combined Illinois addback cost is $1,856 in additional state tax. That is real money, but the combined federal savings from both deductions would typically be several times larger, depending on the worker's federal marginal rate.

What this means for Illinois workers

The Schedule M addback does not eliminate the value of the OBBBA deductions for Illinoisworkers. It reduces the total benefit by 5.0% of the deducted amount. A server in Illinois still saves thousands of dollars in federal tax; she just does not get a matching break from Springfield.

This puts Illinois in the group of states that have explicitly declined to conform to the OBBBA deductions. Other states in this category include Alabama (which uses its own tax base entirely) and Pennsylvania (which taxes eight classes of income independently). Meanwhile, states like Ohio and North Carolina automatically conform because they start from federal AGI.

For a full map of which states conform and which do not, see the state-by-state tips and overtime tax map. To estimate your combined federal and Illinois take-home pay, try the Illinois paycheck calculator. And for a closer look at how Illinois handles the tips deduction specifically, see the Illinois tips tax conformity page.