Does Minnesota Tax Tips in 2026?
Yes - Minnesota taxes tip income in 2026. Minnesota's fixed IRC conformity date predates the OBBBA, and the 2026 legislature (HF 2438) deliberately excluded individual OBBBA deductions from the conformity update. The OBBBA tips deduction (IRC §224) is a below-the-line deduction - it reduces federal taxable income, not federal AGI. Minnesota starts from federal AGI, so the deduction never enters Minnesota's calculation. No Form M1 addback is required. Tip income remains fully subject to Minnesota's graduated income tax rates of 5.35%, 6.80%, 7.85%, and 9.85%.
How Minnesota's Tips Tax Treatment Works
Minnesota uses a fixed IRC conformity date that was set before the OBBBA was enacted in 2025. The 2026 legislature advanced HF 2438, which updated IRC conformity for business provisions, but deliberately excluded individual OBBBA deductions - including the tips deduction under IRC §224. Per MN DOR revenue analysis: "The federal deduction does not affect adjusted gross income, the starting point for calculating Minnesota taxable income."
This statement from the MN DOR points to the key structural issue: the OBBBA tips deduction is a below-the-line deduction. It reduces federal taxable income (Form 1040, Line 15) - not federal adjusted gross income (Form 1040, Line 11). Minnesota starts its income tax calculation from federal AGI. Because the OBBBA tips deduction does not affect federal AGI, it never appears in Minnesota's starting point at all.
The practical result is the same as non-conformity - tip income is fully taxable in Minnesota - but the mechanism is different from what an "addback" would imply. No addback on Form M1 is required because there is nothing to reverse: the deduction simply was not part of the figure Minnesota starts from. Minnesota workers benefit from the federal tips deduction on their IRS return (saving 10%-37% on up to $25,000) but owe Minnesota income tax on the same tip income at rates of 5.35% to 9.85%.
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 |
| Minnesota treatment | Does not conform |
Worked Examples Comparing Federal and Minnesota Treatment
Example 1: Restaurant server (single filer, $40,000 income, $15,000 in tips)
Qualified tip income: $15,000
Tips deduction claimed: $15,000 (capped at $25,000)
Estimated federal tax savings: $1,800.00
Minnesota return:
Minnesota does not recognize the federal tips deduction. The OBBBA tips deduction is below-the-line - it reduces federal taxable income, not federal AGI. Because Minnesota starts from federal AGI, the deduction never enters Minnesota's calculation. No M1 addback is required because the deduction never reduced the starting point. The full $15,000 in tip income remains subject to Minnesota income tax. At this income level, tip income falls in Minnesota's 5.35% bracket ($0-$33,310). Estimated MN tax on tip income: approximately $802.50.
Example 2: Bartender (single filer, $70,000 income, $25,000 in 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
Minnesota return:
Minnesota does not recognize the federal tips deduction. The OBBBA tips deduction is below-the-line - it reduces federal taxable income, not federal AGI. Because Minnesota starts from federal AGI, the deduction never enters Minnesota's calculation. No M1 addback is required because the deduction never reduced the starting point. The full $25,000 in tip income remains subject to Minnesota income tax. At this income level, tip income falls in Minnesota's 6.80% bracket ($33,310-$109,430). Estimated MN tax on tip income: approximately $1,700.
Minnesota-Specific Notes on High Rates and No Conformity
Minnesota has some of the highest marginal income tax rates in the country, reaching 9.85% for income above $203,150 (single filers, TY2026). Even the lowest bracket rate of 5.35% exceeds many states' top rates. This means the absence of OBBBA conformity is particularly impactful for Minnesota tipped workers compared to states with lower rates.
For a server earning $40,000 with $15,000 in tips, the Minnesota tax on tip income alone is approximately $802.50 (at the 5.35% first bracket rate). For a bartender at $70,000 with $25,000 in tips, the Minnesota tax on tip income jumps to approximately $1,700 (at the 6.80% second bracket rate). These amounts are owed regardless of any federal tips deduction claimed.
Why No Form M1 Addback Is Required
Earlier descriptions of Minnesota's treatment of the OBBBA tips deduction suggested that workers must "add back" the federal deduction on Form M1. This was mechanically incorrect. The OBBBA tips deduction reduces federal taxable income, not federal AGI. Minnesota starts from federal AGI - so the deduction was never part of Minnesota's starting number in the first place. There is nothing to add back.
The MN DOR's own revenue analysis confirms this: "The federal deduction does not affect adjusted gross income, the starting point for calculating Minnesota taxable income." The 2026 legislature (HF 2438) advanced conformity for business provisions but deliberately excluded individual OBBBA deductions, confirming that no state-level benefit was intended.
The MN DOR's conformity page at revenue.state.mn.us provides updated guidance on OBBBA treatment.
Related Tools
- No Tax on Tips Calculator - calculate your federal tips deduction
- Minnesota Tax Guide - full state tax overview
- Minnesota Paycheck Calculator
- Does Minnesota Tax Overtime?
- W-2 Code TP: Tips Reporting Guide
- W-2 Code TT: Overtime Reporting Guide
- All 51 States: Tips & Overtime Tax Map