In brief
The U.S. Treasury Department has submitted proposed regulations that will detail the eligibility criteria for President Trump's 'no tax on tips' provision. While this move aims to benefit workers in tipped occupations, the new guidelines appear to limit the number of eligible individuals. Only tips that meet specific criteria, such as being voluntary and reported, will qualify. This provision, expected to cost taxpayers significantly through 2028, offers annual deductions for certain workers but excludes many others.
WASHINGTON (AP) — The Treasury Department is getting closer to fulfilling President Donald Trump’s promise of a no tax on tips policy, but new guidance unveiled on Friday is likely to restrict the number of tipped workers eligible for this benefit.
This regulatory proposal, released on Friday, provides greater clarity on the occupations that will be covered under this rule, along with detailed definitions of what constitutes a qualified tip. Under the tax legislation signed by Trump in July, this provision eliminates federal income tax on tips for those in traditionally tipped roles and allows them to deduct up to $25,000 in qualified tips from their taxable income from 2025 to 2028. However, this deduction will phase out for taxpayers whose modified adjusted gross income exceeds $150,000.
To be classified as a tip, the amount must be earned in an occupation identified on the Treasury's list of qualified occupations. Excluded from the tax benefit are various occupations such as sommeliers, pastry chefs, DJs, and even influencers and content creators, highlighting the limited breadth of the provision.
Additionally, mandatory tips or auto-gratuities are not eligible, but tip pools that are voluntarily reported to the IRS can qualify. Notably, the benefit is not applicable for married individuals who file taxes separately. To qualify, tips also need to be given in forms such as cash, checks, or gift cards, and cannot include amounts received from illegal activities.
The guidance states that this tax provision will be applied retroactively starting January 1, 2025. The Yale Budget Lab estimates approximately 4 million workers in tipped occupations, making up around 2.5% of the workforce in 2023. Budget analysts project that this initiative could add $40 billion to the deficit through 2028, with the deduction alone costing an estimated $32 billion over the next decade.
Importantly, only tips that are reported to employers and noted on W-2 forms will qualify for the tax exemption, while payroll taxes will still apply.
