The Rise of State-Level Tax Enforcement: What You Need to Know

Recent federal tax law changes from the One Big Beautiful Bill Act (OBBBA) impact state tax compliance for 2025 onwards. Some provisions automatically flow through state legislations, while other states need to update their conformance or decouple from the provision. How the new laws impact your tax obligations depends on your state. This article breaks down which states are adopting certain changes and what they mean for you.

What Is the One Big Beautiful Bill Act?

The OBBBA, or the reconciliation bill, aims to reduce taxes, increase the statutory debt limit and update spending for federal programs. It made certain changes from the 2017 Tax Cut and Jobs Act (TCJA) permanent and added new tax rules for the short and long term. Some of the new tax laws take effect in 2025, which impacts tax filing in 2026. Most of the changes start in 2026, which impacts tax filing in 2027.

The most notable changes include:

• Increasing standard deductions
• Permanently removing personal exemptions for spouses, individuals and dependents
• Affixing the tax brackets from the TCJA.

Standard deduction changes at the federal level are:

The tax rate adjustments are:

How the OBBBA Affects State-Level Tax Enforcement

Changes from the OBBBA affect state tax collection methods due to conformity with the Internal Revenue Code (IRC). Federal statutes and rulings are also more extensive than what states can produce, so states usually refer to the federal law for compliance requirements.

Additionally, federal tax code compliance reduces administrative burdens for each state. While states can decouple from federal provisions, they can also modify such provisions based on their specific situation. Changes depend on whether the state has a rolling, static or selective conformity regarding tax laws:

• Rolling conformity: The state automatically adopts federal changes.
• Static conformity: The state adopts federal changes through legislation.
• Selective conformity: The state conforms to select IRC provisions.

Some states don’t charge personal and corporate income tax.

Here’s how states comply with the federal law:

State-Level Tax Enforcement Changes

The most notable state-level tax enforcement changes include personal deductions and corporate tax changes.

Personal Deduction Changes

Ten states and the District of Columbia conform to the federal standard deduction:

1. Arizona
2. Colorado
3. Idaho
4. Iowa
5. Missouri
6. Montana
7. New Mexico
8. North Dakota
9. South Carolina
10. Utah

Additionally, most states use adjusted gross income (AGI) as a starting point when calculating individual income taxes, while others use the federal taxable income. States using the federal taxable income may apply the changes regarding personal and temporary deductions for qualified tips, overtime taxable income and car loan interest.

Some states may also increase their property tax deductions in line with the new state and local tax (SALT) deduction cap. Older adults also get an additional deduction to their previous standard deduction. Here’s what these changes mean for you:

• No tax on tips: You may deduct qualified tips from 2025 to 2028. The annual deduction limit is $25,000, but deductions for self-employed individuals can’t exceed their net income. The deduction phases out for modified AGI over $150,000.
• No tax on overtime: You may deduct qualified overtime pay exceeding your regular rate from 2025 to 2028. The maximum annual deduction is $12,500. The deduction phases out for those with modified AGI over $150,000.
• No tax on car loan interest: You may deduct interest for qualified personal vehicle payments. The maximum annual deduction is $10,000. It phases out for modified AGI of over $100,000.
• SALT deduction cap increase: The OBBBA raises the SALT deduction cap from $10,000 during TCJA to $40,000 for those earning less than $500,000. Over $500,000, the cap reduces by 30% until it reaches $10,000. This cap and income threshold increase 1% annually through 2029. You cannot opt for a SALT deduction alongside the standard deduction.
• Increase in seniors’ deduction: If you’re 65 years old and older, you can get an additional $6,000 deduction. This deduction phases out for modified AGI over $75,000.

Note that six states already have higher standard deductions for older adults and people who are blind. The new $6,000 deduction is a separate provision.

Business Expense Tax Changes

OBBBA brought multiple tax changes for businesses and corporations, most notably including:

• Capital expenditure deductions: Most business expenses, like the cost of goods and compensation, are deductible. However, capital expenditures have deductions spread out based on the depreciation schedules. Under TCJA, corporations could fully expense the capital expenditures in the first year. The OBBBA makes this change permanent.
• Research and development expensing: Similarly, organizations can deduct domestic research and development expenditures right away. Under TCJA, they had to be amortized for over five years. Foreign expenses still need to be amortized for 15 years.
• Increased § 179 expensing cap: The expensing cap for small businesses was raised from $1 million to $2.5 million to help them fully expense their equipment purchases within the first year.
• Permanent excess business loss (EBL) limitations: EBL limits the deduction threshold for noncorporate taxpayers against nonbusiness income, like wages and dividends. This rule is made permanent, allowing disallowed losses to carry over in future years as net operating losses. The threshold for 2025 is $313,000.

Why Trust Polston Tax

At Polston Tax, we’ve been helping clients with their taxes since 2001. Whether you need to identify which deductions to make, resolve your unpaid taxes or improve your accounting processes, our experienced team can help you. Our team includes tax attorneys, case managers, accountants and tax preparers. We work with the IRS daily, so you can count on our myriad experiences to get you the optimal resolution for your needs.

Easily Comply With State-Level Changes Through Polston Tax

OBBBA brings many changes that affect how states implement their tax laws. With advanced state audit trends on the rise, it’s even more essential that you remain compliant. If you’re experiencing difficulties with your unpaid taxes or need help with the complexities of the new tax laws, Polston Tax can work with you.

As a full-service tax and accounting firm, we can help you keep your personal and business taxes in shape while ensuring you don’t fall back into missing payments. Whether you’re looking to negotiate with the IRS, reduce penalties or opt for installment agreements, we can help. Schedule a free consultation today to get started.