Will North Carolina adopt the federal tip deduction for state income tax in 2026?
Executive summary
The North Carolina legislative fiscal office and the 2025 budget framework treat the new federal “no tax on tips” deduction as a state-deductible adjustment for the 2026 tax year, and the General Assembly’s fiscal note projects roughly $41.8–$43.5 million in annual revenue loss if that treatment stands [1]. Federal law creates the deduction for tips earned in 2025–2028 and taxpayers claim it on returns filed in 2026; several state and tax reporting guides note the federal change and its timing [2] [3].
1. What the federal change is and when it takes effect
Congress’ change creates a federal deduction for qualified tip income — up to $25,000 for eligible filers — that applies to tip income earned beginning in 2025 and claimed on returns filed in 2026, and commentators describe the provision as in force for 2025–2028 [2] [3].
2. How North Carolina normally treats federal changes when computing state tax
North Carolina begins its state calculation from federal adjusted gross income and then applies state-specific additions and subtractions; taxpayers choose either the NC standard deduction or NC itemized deductions, and the Department of Revenue limits which federal itemized deductions carry over to NC returns [4]. That framework means some federal changes flow automatically into the state base, but other federal deductions have required explicit state conformity or statutory direction.
3. The decisive evidence: the General Assembly’s fiscal note and budget treatment
The clearest indicator that North Carolina will permit the federal tip deduction in 2026 is the Legislative Fiscal Research analysis and session budget documents, which explicitly treat the deduction as “expected to be deductible in the 2026 tax year” and quantify the impact by multiplying estimated tip income by the 3.99% tax rate to project roughly $41.8 million in lost General Fund revenue for FY 2026–27 [1]. That fiscal projection was prepared in the context of the 2025 session’s budget planning, showing lawmakers anticipated state conformity for the deduction.
4. Why that matters politically and fiscally
The fiscal note’s projection is not merely academic: it was used to calculate triggers and revenue impacts in the House budget and reflects a policy choice embedded in legislative budgeting [1]. At the same time, North Carolina’s legislature in recent years has made phased tax-rate changes and tied some future adjustments to revenue triggers, so the net effect on the state budget depends on broader revenue decisions beyond the tip deduction itself [5].
5. The remaining uncertainties and administrative steps
While the fiscal office and budget documents assume state deductibility in 2026, final legal effect depends on the statutory language adopted by the General Assembly and any North Carolina Department of Revenue guidance or rulemaking that follows; the state’s general practice of starting from federal AGI points toward conformity but does not automatically resolve every new federal provision’s state treatment [4]. The available DOR withholding and instruction pages were referenced in planning but do not, in the provided reporting set, include a separate authoritative statement explicitly pronouncing final administrative conformity for the tip deduction [6] [4].
6. Bottom line answer
Based on the North Carolina Legislative Fiscal Research note and the budget materials from the 2025 session, North Carolina is expected to adopt the federal tip deduction for the 2026 tax year and budget analysts have modeled its revenue impact accordingly, so taxpayers and payroll systems should prepare for state deductibility in 2026 unless later legislative or administrative action reverses that assumption [1] [2]. However, a final, definitive determination requires watching the enacted statutory language and any NCDOR instructions or bulletins that formally implement the change [4] [6].