Trump’s New Tax Bill Targets Tax-Free Tips for Service Workers

If you work in a service industry where tips account for a significant portion of your earnings, President Donald Trump’s initiative to eliminate taxes on tips may be of great interest to you. Although he has only been in office for a few months, the president is actively pursuing this promise through a Republican-backed tax bill currently in the House of Representatives.

The proposed 389-page bill encompasses various tax reforms, notably highlighting the removal of taxes on tips. While the fate of this legislation remains uncertain, it provides a glimpse into how such a change could be implemented.

Mechanics of Tax-Free Tips

The bill outlines clear guidelines regarding how this new rule would function. Firstly, only “qualified tips” are eligible for this tax exemption. These tips include cash payments and equivalents, such as credit card or mobile payments, given in occupations that typically receive tips. Voluntary payments, where the amount is determined by the giver, qualify for this provision. Additionally, individuals must not be classified as highly compensated employees to benefit from this deduction.

Self-employed individuals can also take advantage of this rule; however, your business must show a profit for you to deduct tips. Generating a loss due to deducting tips would not be permissible under this legislation.

You can claim this deduction regardless of whether you take the standard deduction or itemize your taxes. It is essential to include your Social Security number on your tax return, and if you’re married, your spouse’s Social Security number is also required. Tips must be reported to the IRS and will typically appear on your W-2 or 1099 forms, simplifying compliance.

Pending Details in the Bill

Although the Republican-backed bill presents the overarching framework, certain specifics still require deliberation. Notably, the current bill indicates that the tax-free tip provision would only be effective until 2028. A decision on whether this rule could become permanent will likely take place after the government observes its practical implications.

One significant concern is the possibility of employers reclassifying salaries as tips to avoid taxes. The bill stipulates that the Secretary of the Treasury “shall prescribe such regulations or other guidance as may be necessary to prevent reclassification of income as qualified tips.” The nature of these regulations remains to be determined.

Moreover, the Secretary of the Treasury is tasked with creating a list of occupations that customarily receive tips by December 31, 2024. To qualify for the tip deduction, workers must be in one of these predefined industries. Preliminary indications indicate that this will include sectors involved in the “providing, delivering, or serving of food or beverages,” as well as beauty services such as barbering, hair styling, nail care, and spa treatments. Additional occupations may be added to this list in the future.

It’s vital to recognize that there are still challenges to eliminate taxes on tips. Should the bill pass the House, it will need to navigate the Senate, where substantial modifications could still occur. Thus, while tax-free tips present an appealing prospect, it remains uncertain.

Considerations for Social Security Benefits

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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.