In brief
The Treasury Department is advancing President Trump’s commitment to eliminate federal income taxes on tips earned by tipped workers, with new regulations clarifying the definitions and qualifications. While many occupations stand to gain, the eligibility criteria are expected to restrict the number of beneficiaries significantly. The provision aims for retroactive implementation from January 1, 2025, with potential budgetary impacts projected to run in the tens of billions.
WASHINGTON (AP) — The U.S. Treasury Department is taking significant steps toward fulfilling President Trump's 'no tax on tips' commitment, as new guidance was released that clarifies which tipped workers will benefit from this provision. Proposed regulations submitted to the Federal Register provide detailed instructions on the eligible occupations and what constitutes a 'qualified tip.'
Under the existing provision enacted within a sweeping tax law signed by Trump, federal income taxes on tips for workers in traditionally tipped jobs were eliminated. Moreover, certain workers can deduct a maximum of $25,000 in 'qualified tips' from 2025 to 2028, although this option phases out for those with a modified adjusted gross income exceeding $150,000.
To qualify, tips must be derived from jobs listed in the Treasury's qualification document. Notably, many exempted roles include sommeliers, DJs, online creators, and others in various service sectors. However, mandatory tips or auto-gratuities will not be deemed eligible benefits, though voluntary tip pooling arrangements will qualify.
Noteworthy exclusions exist for married taxpayers who file separately, limiting access to this tax benefit. Tips must also be provided in traditional forms such as cash, checks, or gift cards; digital currencies do not qualify.
The 'no tax on tips' policy aims for retroactive implementation starting January 1, 2025. According to estimates from the Yale Budget Lab, around 4 million workers in tipped roles could benefit, representing approximately 2.5% of the workforce.
However, budget analysts anticipate that this provision could increase the deficit by up to $40 billion by 2028, contradicting some economic objectives. Additionally, payroll taxes will still be enforced on reported tips to fund Social Security and Medicare, leading to concerns over the fiscal implications.
