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Tax Year 2026Updated July 13, 2026

Does New Mexico Tax Tips in 2026?

As of September 2026, New Mexico has not issued official guidance on whether it recognizes the federal OBBBA tips deduction (IRC §224). New Mexico's 2026 legislation addressed certain OBBBA provisions, but the individual tips deduction treatment has not been explicitly confirmed by the Taxation and Revenue Department. The federal deduction still applies on your federal return regardless, saving up to $25,000 in taxable income.

How New Mexico's Tips Tax Treatment Works

New Mexico's individual income tax is calculated based on New Mexico taxable income, which starts from federal adjusted gross income with New Mexico-specific modifications. This means changes to federal AGI – such as the OBBBA tips deduction – can potentially flow through to New Mexico's tax calculation, depending on whether New Mexico has adopted or decoupled from the specific provision.

In 2026, the New Mexico Legislature passed legislation that addressed certain provisions of the OBBBA. However, the scope of this legislation – and specifically whether it encompasses the individual tips deduction under IRC §224 – has not been explicitly clarified by the New Mexico Taxation and Revenue Department. This creates uncertainty for tipped workers filing their 2026 state returns.

New Mexico's graduated rate structure has six brackets, ranging from 1.5% on the first $5,500 of taxable income (single filers) to 5.9% on income above $210,000. Most tipped workers fall in the middle brackets, typically between 3.2% and 4.7%. If New Mexico does conform, the state savings would be meaningful but lower than in high-tax states like Hawaii or California.

Federal Tips Deduction Quick Reference

DetailValue
IRC Section§224 (OBBBA)
Maximum deduction$25,000 tips
Deduction typeAbove-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 datesJan 1, 2025 – Dec 31, 2028
New Mexico treatmentDoes not conform

Worked Examples Comparing Federal and New Mexico Treatment

Example 1: Restaurant server (single filer, $45,000 income, $18,000 in tips)

Federal return:
Qualified tip income: $18,000
Tips deduction claimed: $18,000 (capped at $25,000)
Estimated federal tax savings: $2,160.00

New Mexico return:
New Mexico has not confirmed whether individual taxpayers can claim the OBBBA tips deduction at the state level. While 2026 legislation addressed certain OBBBA provisions, the individual tips deduction treatment remains unconfirmed. If NM conforms, savings at the 4.7% bracket could be approximately $846. If not, the full $18,000 remains subject to NM income tax.

Example 2: Resort worker (single filer, $75,000 income, $25,000 in tips - federal cap reached)

Federal return:
Qualified tip income: $25,000
Tips deduction claimed: $25,000 (capped at $25,000)
Estimated federal tax savings: $5,500.00

New Mexico return:
New Mexico's treatment of the tips deduction remains unconfirmed. If NM conforms, savings at the 4.7% bracket could be approximately $1,175. If NM does not recognize the deduction, the full $25,000 in tips remains taxable at New Mexico rates up to 4.7%.

New Mexico's OBBBA Response and Tip Income

New Mexico occupies a unique position among states with unknown conformity status. Unlike states that have taken no action at all, New Mexico's legislature passed 2026 legislation that addressed certain OBBBA provisions. However, the individual tips deduction treatment remains in a gray area – neither explicitly adopted nor rejected at the state level.

Gross Receipts Tax vs. income tax: New Mexico uses a Gross Receipts Tax (GRT) rather than a traditional sales tax. The GRT is imposed on businesses, not individuals, and is unrelated to the income tax tips deduction. However, the GRT's varying local rates (typically 5%–9%) add complexity to New Mexico's overall tax landscape for hospitality businesses.

Tourism and hospitality: New Mexico's economy includes a significant tourism and hospitality sector, with Santa Fe, Taos, Albuquerque, and the state's ski resorts employing thousands of tipped workers. The art gallery, restaurant, and hotel industries in Santa Fe alone represent a meaningful concentration of tip-earning workers who would benefit from state-level conformity.

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Frequently Asked Questions

Does New Mexico conform to the federal 'no tax on tips' deduction under the OBBBA?
As of September 2026, New Mexico has not confirmed whether individual taxpayers can claim the OBBBA tips deduction (IRC §224) on their state return. New Mexico's 2026 legislation addressed certain OBBBA provisions, but the individual tips deduction treatment has not been explicitly confirmed by the Taxation and Revenue Department.
What did New Mexico's 2026 OBBBA legislation address?
New Mexico passed legislation in 2026 that addressed certain provisions of the OBBBA at the state level. However, the scope of this legislation and whether it specifically includes the individual tips deduction (IRC §224) has not been explicitly clarified by the New Mexico Taxation and Revenue Department. Taxpayers should watch for administrative guidance before assuming the deduction applies.
What New Mexico income tax rate would apply to my tip income?
New Mexico has six graduated income tax brackets with rates ranging from 1.5% to 5.9%. For single filers, the top 5.9% rate applies to income above $210,000. Most tipped workers fall in the 3.2% to 4.7% range. The 4.7% rate applies to single filers with taxable income between $33,500 and $66,500.
How does New Mexico's Gross Receipts Tax (GRT) affect tipped workers?
New Mexico uses a Gross Receipts Tax (GRT) rather than a traditional sales tax. The GRT is imposed on businesses and varies by location (typically 5%–9% including local components). The GRT is separate from income tax and is not affected by the tips deduction question. Tips are subject to income tax, not GRT directly.
Do I still get the federal tips deduction if I live in New Mexico?
Yes. The federal tips deduction under IRC §224 applies on your federal Form 1040 regardless of where you live. You can deduct up to $25,000 in qualified tip income from your federal AGI. The open question is only whether New Mexico also recognizes this deduction on your state return.
Why is the conformity question important for New Mexico's hospitality industry?
New Mexico's tourism and hospitality sector – including Santa Fe's dining scene, ski resorts like Taos and Angel Fire, and Albuquerque's hotel industry – employs a significant number of tipped workers. If New Mexico conforms, these workers could see meaningful state tax savings in addition to the federal benefit. If it does not, tips remain fully taxable at New Mexico's graduated rates.