When Donald Trump climbed onto stage at a Nevada campaign rally in June 2024 and pledged "no taxes on tips," his proclamation was brushed off by many pundits as the usual Trumpian stump speech improvisation. Just over a year later, what was once dismissed as farcical has now become the law of the land with the passage of the One Big Beautiful Bill Act (OBBBA). But the policy wisdom of tax-free tips is still open for debate.
Under the OBBBA, workers can treat tips as an above-the-line deduction for the first $25,000 in tips they receive. The deduction will apply to federal income taxes, but not federal payroll taxes, and it will phase out for workers making over $150,000 individually or $300,000 jointly. Like many of the other tax breaks, it is also temporary, expiring in 2028.
While this deduction will no doubt allow many servers to take home more of their tips, the implementation details show the limitations of the tax break. The deduction is meant to apply to occupations that "customarily and regularly receive tips"—a list of which will be developed by the Treasury Department and the IRS.
