No matter what tax alterations emerge from Congress this year, it seems more probable than ever before that employees who receive tips will see some relief.

On May 22, the U.S. Congress

passed sweeping legislation

(referring to it as his “single, large, impressive piece of legislation” by President Donald Trump) aimed at reducing taxes, decreasing expenditures, and increasing the debt ceiling. The legislation also featured a provision to lower federal income taxes on gratuities.

The outcome for that bill remains uncertain as the U.S. Senate prepares to address it. However, on May 20, the Senate took action regarding this matter.

passed stand-alone legislation to cut taxes on tips

And they all agreed on this decision. Combined, these factors indicate that it’s quite likely a form of tax relief for tipped wages will pass through Congress this year. Given that this was one of his campaign promises, Trump will very probably endorse it when it lands on his desk.



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The proposed measures have some variations, and further modifications might still occur before anything gets officially enacted. However, here’s a brief overview of what has caught attention so far:

Employees can claim tips as a tax deduction.

It’s quite straightforward: Should this pass, employees who declare tips will be permitted to subtract that sum from their earnings when filing federal tax returns, thereby reducing the taxable adjusted gross income they owe.

Regardless of where they reside, they would still be liable for state taxes on that earnings. However, Michigan does not offer a deduction for tips received.

although some have suggested it should do so

.)

What qualifies as a tip?

Qualifying tips are also limited to those that are considered cash payments, which includes currency but also those paid by credit card or other means. It does not include noncash items like tickets, gifts or services.

The

House bill

also says that in order to be considered a tip, the payment must be paid voluntarily without negotiation and “without any consequence in the event of nonpayment.” Added service charges don’t qualify.

Are there restrictions on who gets the deduction?

Certainly, although this might evolve. Initially, nobody qualified as a “highly compensated employee”—a classification defined annually by the Internal Revenue Service; however, for now, this threshold remains unchanged.

anyone earning $160,000 or above

annually or holds 5% or more ownership in their own business — meets the criteria.

Secondly, according to the House bill, the claimant must possess a Social Security number, indicating they should either be a U.S. citizen or hold permission to work within the country. Additionally, for cases involving a joint tax return, the claimant’s spouse is required to have a Social Security number too.

Third, and most critically: The individual reporting tip earnings must work in a profession known for receiving tips as both tradition and standard practice. However, neither of the proposals defines these specific professions, deferring instead to the Treasury Department to compile such a list. This would probably encompass individuals working in hospitality roles at establishments like bars and restaurants; transportation providers including taxis, rideshares, and delivery services; personal care professionals like barbers and salon staff; cleaning personnel; maintenance workers and similar positions. (It’s worth noting that performing artists and financial advisors do not seem to fall under this category according to either proposal.)

The deduction isn’t applied towards offsetting losses.

The House bill states that if operating the business incurs expenses greater than the income claimed by an individual—that is, their profits—no deductions can be made.

Is there a cap on what you can deduct?

The version approved by the Senate includes a deduction limit of $25,000. The draft from the House does not specify any such limitation.

What happens if I choose not to itemize my deductions?

It doesn’t matter in this case. The proposals are intended to allow people who don’t itemize to deduct qualifying tips from their income as well.

Will the tax break on tips remain in place?

Unclear, though as a practical matter, it’s very unusual for Congress to give some group of working-class employees a tax break and then take it away. The House proposal would put the break in place through 2028. The Senate version doesn’t include an expiration.

How many people will it affect and how much will it cost?

According to some news media reports, there are about

4 million workers who work in occupations

Those who receive tips remain uncertain as to how many actually earn sufficient income to surpass the threshold for the standard tax deduction. Additionally, there have been some worries expressed about potential issues faced by workers in this regard.

encouraged to depend more on tips rather than salaries

—which might render them more susceptible if gratuities dwindle. In the meantime, the

Committee for Fiscal Responsibility and Balance

A nonpartisan oversight organization based in Washington calculates that the tax benefit related to tips has the potential to decrease federal revenue by approximately $40 billion from now until 2028.

Reach out to Todd Spangler at tspangler@freepress.com. Stay updated with his posts on X under the handle @tsspangler.
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The article initially appeared on the Detroit Free Press.

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