Does Illinois Tax Tips in 2026?
Yes - Illinois still taxes tip income in 2026. Although Illinois starts its tax computation from federal AGI, the state requires the federal OBBBA tips deduction (IRC §224) to be added back on Illinois Schedule M. This means your tips are still fully taxed at IL's flat 4.95% rate - the federal deduction provides no Illinois tax savings.
How Illinois's Tips Tax Treatment Works
Illinois uses a different non-conformity mechanism than Pennsylvania or New Jersey. Rather than having a completely separate tax system, Illinois starts from federal adjusted gross income (AGI) on your IL-1040. However, Illinois then requires certain federal deductions to be "added back" on Schedule M to arrive at Illinois base income.
The OBBBA tips deduction (IRC §224) is one of these addback items. When you claim the federal tips deduction on your Form 1040, reducing your federal AGI, Illinois requires you to add that same amount back on Schedule M. The result: your Illinois base income is the same as if you never took the federal tips deduction. Your tips are then taxed at the full 4.95% flat rate.
This "addback" approach is common in states that generally conform to federal AGI but want to reject specific federal deductions. It is a deliberate policy choice by the Illinois Department of Revenue (IDOR), not a structural limitation of IL's tax system. Illinois could, in theory, choose to conform to the tips deduction without restructuring its entire tax code - but as of 2026, it has not done so.
Federal Tips Deduction Quick Reference
| Detail | Value |
|---|---|
| IRC Section | §224 (OBBBA) |
| Maximum deduction | $25,000 tips |
| Deduction type | Above-the-line (Schedule 1-A) |
| FICA still applies? | Yes (Social Security 6.2% + Medicare 1.45%) |
| MFS eligible? | No (MFJ or Single/HoH only) |
| Effective dates | Jan 1, 2025 – Dec 31, 2028 |
| Illinois treatment | Does not conform |
Worked Examples Comparing Federal and Illinois Treatment
Example 1: Casino dealer with $12,000 in annual tips
Qualified tip income: $12,000
Tips deduction claimed: $12,000 (capped at $25,000)
Estimated federal tax savings: $1,440.00
Illinois return:
IL requires the $12,000 federal tips deduction to be added back on Schedule M. Your tips are still taxed at 4.95% = $594.00 in IL tax. No state-level savings.
Example 2: Valet with $25,000 in annual tips (federal cap reached)
Qualified tip income: $25,000
Tips deduction claimed: $25,000 (capped at $25,000)
Estimated federal tax savings: $5,500.00
Illinois return:
IL requires the $25,000 federal tips deduction to be added back on Schedule M. Your tips are still taxed at 4.95% = $1237.50 in IL tax. No state-level savings.
Illinois-Specific Rules for Tipped Workers
Schedule M addback is mandatory. If you claim the federal tips deduction on your Form 1040, you must add it back on Illinois Schedule M when filing your IL-1040. Failing to include this addback may result in an underpayment assessment and penalties from IDOR.
No standard deduction in Illinois. Illinois does not offer a standard deduction. The state provides a personal exemption of $2,925 per person ($5,850 MFJ) for 2026, but this is far smaller than the federal standard deduction. All tip income beyond this exemption is taxed at 4.95%.
No local income tax. Illinois does not impose municipal income taxes. Cook County and Chicago impose local sales taxes and other levies, but there is no local income tax on tips or any other earnings. Your IL flat tax is the only state-level income tax on tips.
Related Tools
- No Tax on Tips Calculator - calculate your federal tips deduction
- Illinois Tax Guide - full state tax overview
- Illinois Paycheck Calculator
- Does Illinois Tax Overtime?
- W-2 Code TP: Tips Reporting Guide
- W-2 Code TT: Overtime Reporting Guide
- All 51 States: Tips & Overtime Tax Map