During
the
2024
election
campaign,
both
presidential
candidates
Donald
Trump
and
Kamala
Harris
proposed
excluding
tips
from
income
taxes.
I
argued
a
year
ago
that
doing
this
would
create
more
problems
than
benefits.
It
will
further
complicate
the
tax
laws,
incentivize
businesses
to
convert
to
a
tip-based
compensation
structure,
deprive
a
subset
of
people
of
future
Social
Security
benefits,
and
exacerbate
tip
culture.
When
Trump
regained
the
presidency,
he
included
a
“No
Tax
On
Tips”
provision
on
his
One
Big
Beautiful
Bill.
So
let’s
examine
what
the
bill
actually
says
and
analyze
whether
it
addresses
the
problems
I
stated
above.
The
“No
Tax
On
Tips”
Law.
From
2025
until
2028,
employees
and
self-employed
individuals
may
deduct
qualified
tips
received
in
occupations
that
customarily
and
regularly
receive
tips.
The
IRS
must
publish
a
list
of
occupations
that
customarily
and
regularly
receives
tips
by
October
2,
2025.
A
qualified
tip
is
a
voluntary,
nonnegotiated
payment
from
the
customer
with
no
consequence
for
nonpayment.
The
maximum
annual
deduction
is
$25,000.
For
self-employed
individuals,
the
deduction
may
not
exceed
the
individual’s
net
income
from
the
trade
or
business
in
which
the
tips
were
earned.
In
other
words,
the
deduction
cannot
be
used
to
create
a
net
operating
loss
(or
negative
income)
which
can
be
carried
forward
to
offset
future
income.
The
deduction
phases
out
for
taxpayers
with
modified
adjusted
gross
income
over
$150,000,
or
over
$300,000
for
joint
filers.
There
are
some
limitations.
Self-employed
individuals
in
a
Specified
Service
Trade
or
Business
(SSTB)
are
not
eligible
for
the
deduction.
A
business
is
considered
an
SSTB
if
the
principal
asset
of
that
business
is
the
reputation
or
skill
of
its
owners
and
employees.
The
treasury
regulations
list
examples
of
SSTBs
which
include
services
in
the
fields
of
health,
law
(emphasis
added),
accounting,
actuarial
science,
performing
arts
(remember
this),
consulting,
athletics,
financial
services,
and
brokerage
services.
Also,
individuals
must
have
Social
Security
numbers
to
claim
the
deductions.
A
person
who
does
not
have
a
SSN
but
instead
has
an
Individual
Taxpayer
Identification
Number
(ITIN)
cannot
use
the
deduction.
Married
taxpayers
cannot
file
separately.
Analysis.
First,
it
is
important
to
note
that
this
a
deduction
from
taxable
income
which
will
reduce
federal
income
tax.
This
deduction
will
not
reduce
payroll
or
self-employment
taxes
which
means
it
will
not
negatively
affect
Social
Security.
Also,
the
deduction
will
not
reduce
adjusted
gross
income
which
is
used
to
determine
things
like
income-based
student
loan
payments.
The
tax
savings
will
vary
based
on
the
individual.
A
taxpayer
who
takes
the
full
$25,000
deduction
and
does
not
exceed
the
income
maximum
of
$150,000
(24%
tax
bracket)
will
save
$6,000
in
taxes.
On
the
other
hand,
a
part-time
employee
who
earns
less
than
the
standard
deduction
amount
of
$15,750
will
get
no
tax
savings.
In
light
of
the
limitations
imposed,
people
receiving
tips
in
cash
will
not
be
inclined
to
report
it,
especially
if
they
have
reached
the
annual
maximum
or
their
income
has
made
them
ineligible.
Next,
let’s
look
at
the
people
who
can
take
advantage
of
this
deduction.
While
the
IRS
has
not
yet
released
its
official
list
of
trades
or
businesses
that
customarily
receives
tips,
the
Treasury
Department
released
a
preliminary
list
in
August.
For
the
most
part,
the
list
is
not
surprising.
In
fact,
in
certain
industries
such
as
food
service,
the
occupation
list
is
very
broad
and
includes
cooks,
food
preparation
workers,
and
dishwashers.
The
list
also
included
occupations
which
may
or
may
not
customarily
receive
tips.
This
includes
—
among
others
—
electricians,
plumbers,
and
locksmiths.
For
those
who
do
not
receive
tips,
they
might
try
adjust
their
business
practices
so
they
can
reclassify
a
portion
of
their
income
as
tips.
Another
unexpected
eligible
occupation
is
the
digital
content
creator.
This
includes
online
video
creators,
social
media
influencers,
and
podcasters.
For
these
people,
the
IRS
will
need
to
look
at
what
these
people
are
doing.
For
example,
are
they
giving
legal
advice
on
their
podcast?
Or
are
they
dancing
or
performing
only
for
their
fans?
If
so,
they
may
be
engaging
in
an
SSTB.
The
list
included
some
occupations
that
could
be
considered
SSTBs
and
thus
ineligible
to
take
the
tip
deduction.
These
include
musicians,
singers,
and
entertainers
which
are
specifically
listed
in
the
treasury
regulations.
When
there
is
a
conflict,
what
is
stated
in
the
treasury
regulations
generally
trump
IRS
notices,
revenue
rulings,
and
memorandums.
The
IRS
will
need
to
clarify
this
conflict
when
it
releases
its
final
list
of
eligible
occupations.
Next,
as
mentioned,
the
customer
has
to
give
the
tip
voluntarily.
This
means
that
giving
a
“suggested
amount”
—
usually
given
so
the
customer
does
not
have
to
calculate
the
amount
themselves
—
is
still
considered
voluntary.
But
there
are
certain
situations
where
a
gratuity
is
required.
Usually
this
is
the
case
where
a
large
party
is
served.
But
some
restaurants
have
begun
to
charge
service
fees
in
lieu
of
tips,
usually
for
tip-sharing
purposes.
Since
these
tips
are
required
and
not
voluntary,
that
could
mean
that
this
tip
income
is
nondeductible.
Lastly,
denying
the
deduction
for
those
who
do
not
have
SSNs
is
meant
to
target
undocumented
immigrants.
Since
this
is
not
a
tax
increase,
they
will
continue
to
file
tax
returns
and
pay
taxes
and
will
likely
continue
their
way
of
life.
Also,
an
argument
could
be
made
that
they
are
paying
more
than
their
fair
share
since
they
are
paying
more
taxes
than
a
similarly
situated
U.S.
citizen
or
permanent
resident.
In
sum,
the
new
law
isn’t
likely
to
change
much.
The
IRS
will
need
to
clarify
potential
conflicts
in
its
upcoming
guidance.
But
it
appears
that
those
with
higher
incomes
will
get
the
most
tax
savings.
Steven
Chung
is
a
tax
attorney
in
Los
Angeles,
California.
He
helps
people
with
basic
tax
planning
and
resolve
tax
disputes.
He
is
also
sympathetic
to
people
with
large
student
loans.
He
can
be
reached
via
email
at
[email protected].
Or
you
can
connect
with
him
on
Twitter
(@stevenchung)
and
connect
with
him
on LinkedIn.