Understanding tip exemptions and what constitutes a tip: New regulations explained
In a significant move, the "No Tax on Tips" provision has been introduced as part of the tax and spending law signed by President Donald Trump in July. This provision, set to be implemented retroactively from January 1, 2025, aims to eliminate federal income taxes on tips for certain workers.
To qualify for this benefit, the tip must be earned in an occupation on Treasury's list of qualified occupations. The list includes a diverse range of professions, such as sommeliers, cocktail waiters, pastry chefs, and cake bakers, as well as jobs in the service industry like bingo workers, club dancers, DJs, and ushers. It also encompasses roles in home services, such as maids, gardeners, electricians, house cleaners, tow truck drivers, and wedding planners. The list also includes personal care aides, tutors, au pairs, massage therapists, yoga instructors, and various outdoor activities like skydiving pilots, ski instructors, and parking garage attendants. Delivery drivers, movers, and online content creators like podcasters, influencers, and online video creators are also included.
The tip must be voluntarily given and can be in the form of cash, check, debit card, gift card, or any item exchangeable for a fixed amount of cash. However, any amount received for illegal activity, prostitution services, or pornographic activity does not qualify as a tip.
The deduction phases out for taxpayers with a modified adjusted gross income over $150,000, and the benefit is not available to married individuals who file their taxes separately.
Congressional budget analysts project that the "No Tax on Tips" provision would increase the deficit by $40 billion through 2028. In June, the nonpartisan Joint Committee on Taxation estimated that the tips deduction will cost $32 billion over 10 years.
It's worth noting that there are currently no publicly available updates or discussion details regarding the extension of the Treasury Department regulations aimed at fulfilling President Donald Trump's promise of "no taxes on tips" and which professions might qualify for this benefit beyond 2028.
According to the Yale Budget Lab, there were roughly 4 million workers in tipped occupations in 2023, which amounts to roughly 2.5% of all jobs. This provision could potentially bring significant financial relief to these workers.
However, it's important to remember that the tip pools and similar arrangements must be reported to the IRS and voluntary to qualify for the "no tax on tips" benefit. Additionally, the provision does not apply to mandatory tips or auto-gratuities.
As the implementation date approaches, it will be interesting to see how this provision impacts the tipped workforce and the broader economy. Stay tuned for more updates.
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