President Trump’s initiative to abolish taxes on tips is progressing toward enactment, following a recent Senate vote. On Tuesday, Senate Republicans passed their version of the tax and spending plan with a slim 51-50 margin, aided by Vice President JD Vance’s tie-breaking vote.
A significant aspect of this legislation introduces an above-the-line deduction for tips earned by workers in traditionally tipped occupations. This means that individuals, such as bartenders, will have the opportunity to deduct their total tip income from their taxable earnings for the year.
However, certain restrictions are included in the approved measure. The deduction phases out for individuals earning over $150,000 annually, or $300,000 for joint filers, and is set to expire in 2028. Furthermore, the deduction has a cap of $25,000. It’s also important to note that this exemption only pertains to federal income tax; tipped workers would still be liable for state and local income and payroll taxes.
Currently, tips are classified as regular income and are required to be reported alongside wages on a worker’s W-2 form. According to Lawrence Pon, a certified public accountant in California, this has been the longstanding practice for many years.
If this provision is successfully enacted, it would represent a significant shift in the taxation of tipped workers, allowing them to deduct tips directly from their income, potentially easing their overall tax burden.
The potential impact of this measure could provide much-needed relief for workers in the service industry, promoting economic stability for many who rely on tips as a substantial portion of their income.