What's Happening?
A new tax law introduced by President Trump, known as the 'Big Beautiful Bill,' will allow service workers to deduct tips from their taxable income, exempting these earnings from federal income taxes.
This legislation applies to tips earned in traditionally tipped occupations, such as bartenders, wait staff, and other service roles. Workers can deduct up to $25,000 per year in qualified tips, which include cash tips, tips paid by card, and those earned through tip-sharing arrangements. However, these tips will still be subject to federal payroll tax, as well as state and local income and payroll taxes. The deduction begins to phase out for single-filers earning more than $150,000 and joint-filers earning more than $300,000. The U.S. Department of the Treasury has released a preliminary list of 68 jobs that may qualify for this deduction, with an official list expected soon.
Why It's Important?
This tax deduction is significant as it provides financial relief to millions of service workers who rely heavily on tips for their income. According to the Yale Budget Lab, there were approximately four million regularly tipped workers in the U.S. in 2023, representing about 2.5% of all workers. The Tax Policy Center estimates that around 60% of households with tipped workers will benefit from this legislation, with an average tax savings of about $1,800 per year. This could lead to increased disposable income for these workers, potentially boosting consumer spending and stimulating economic activity in sectors reliant on discretionary spending.
What's Next?
The new deduction is temporary and set to expire after 2028 unless further legislation is enacted to extend it. The U.S. Department of the Treasury is expected to publish an official list of qualifying occupations in the Federal Register for public comment. This process may lead to adjustments in the list of eligible jobs, impacting who can benefit from the deduction. Stakeholders, including service industry representatives and policymakers, may engage in discussions to advocate for the extension or modification of this tax benefit.
