Does Illinois Tax Tips in 2026?
Yes - Illinois still taxes tip income in 2026. Illinois starts from federal AGI, and the federal OBBBA tips deduction (IRC §224) is taken after AGI, so it never enters the Illinois calculation. Your tips are taxed at IL's flat 4.95% rate - the federal deduction provides no Illinois tax savings, and there is no Schedule M addback.
How Illinois's Tips Tax Treatment Works
Illinois starts from federal adjusted gross income (AGI) on line 1 of the IL-1040, then applies Illinois additions and subtractions on Schedule M.
The OBBBA tips deduction (IRC §224) is not part of AGI. It is figured on Schedule 1-A, which starts from AGI, and subtracted on Form 1040 line 13b to reach federal taxable income. Because Illinois picks up the federal figure before that step, the tips deduction never reaches the Illinois return. There is nothing to reverse, so there is no addback.
The practical result is the same as non-conformity: your tips are taxed at the full 4.95% flat rate. Illinois workers would get state relief only if Illinois enacted its own subtraction for tips, which it has not done for 2026.
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:
The $12,000 federal tips deduction is taken after AGI, so it never reaches your IL-1040. Your tips are taxed at 4.95% = $594.00 in IL tax. No state-level savings, and no Schedule M entry.
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:
The $25,000 federal tips deduction is taken after AGI, so it never reaches your IL-1040. Your tips are taxed at 4.95% = $1237.50 in IL tax. No state-level savings, and no Schedule M entry.
Illinois-Specific Rules for Tipped Workers
No Schedule M entry for tips. Start your IL-1040 from federal AGI as usual. The federal tips deduction is not part of that figure, and Schedule M has no line for it.
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