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Forbes
a day ago
- Business
- Forbes
No Tax On Tips Explained
TOPSHOT - US President Donald Trump (C) shows his signature on the "Big Beautiful Bill Act" at the ... More White House in Washington, DC, on July 4, 2025. US President Donald Trump signed his flagship tax and spending bill on July 4 in a pomp-laden Independence Day ceremony featuring fireworks and a flypast by the type of stealth bomber that bombed Iran. Trump pushed Republican lawmakers to get his unpopular "One Big Beautiful Bill" through a reluctant Congress in time for him to sign it into law on the US national holiday — and they did so with a day to spare Thursday. (Photo by Brendan SMIALOWSKI / POOL / AFP) (Photo by BRENDAN SMIALOWSKI/POOL/AFP via Getty Images) Should gratuities be tax-free? That's the premise behind the 'No Tax on Tips' provision of the One Big Beautiful Bill Act (OBBBA). Starting in 2025, tipped workers will be able to deduct up to $25,000 from their taxable income—though not from payroll taxes. It is an applause line with broad political appeal, especially among workers in tip-heavy industries like hospitality. But, just like the overtime deduction, this isn't strictly speaking a pure tax cut—it's a narrowly tailored deduction that chooses winners and losers and comes with a host of administrative headaches. While it may seem like relief for low-wage workers, under the hood it is quite a bit more complicated. What No Tax on Tips Does To start, the 'no tax on tips' provision of the OBBBA, Section 70201, isn't a tax exemption—it's a deduction. Specifically, it is an above the line deduction of up to $25,000 for tips received in the course of ordinary employment, as long as they are voluntary and properly reported. Like the overtime deduction, this one is also temporary: it applies through tax year 2028. It is also gated. Tips must be reported on a W-2 or other IRS-recognized form, and the job must be one that customarily receives tips—the Treasury Department will be issuing guidance fleshing out that latter bit. If you work in hospitality, you will probably qualify. If you're a flyfishing instructor collecting Venmo payments and occasional cash thank-yous, maybe not. The deduction doesn't apply to automatic service charges, like those mandatory 20% gratuity tack-ons for large parties. The deduction is also completely unavailable to anyone working in Specified Service Trades or Businesses (SSTB), which is an exclusion category that includes lawyers, financial advisors, and any job where the key asset is skill. Whether employees of SSTBs are also excluded remains an open question. As with the overtime deduction, this one phases out for higher earners—specifically those with modified adjusted gross income over $150,000 for a single filer or $300,000 for joint filers. The tips also remain subject to payroll taxes, so this isn't a full tax holiday but is instead a narrow, federally blessed deduction for some earnings stemming from very specific kinds of labor. Who Benefits From No Tax on Tips? The political pitch is pretty simple: this is for the hardworking bartender, waiter, or barista trying to make their paycheck stretch over an ever-increasing cost of living. But, as with the overtime deduction, the real story lies in the actual tax math—and who has enough income to fully benefit. More than 4 million Americans work in tipped occupations, but many of them earn too little to owe federal income tax in the first place. Between the standard deduction and other credits, a huge share of tipped workers—many single parents and part-time employees that could most benefit—already have zero income tax liability. For them, the deduction is a mirage. As a deduction, it does not generate a refundable credit if it brings an employee's taxable income below $0. Thus, the real winners are middle-income workers in full-time, tip-heavy jobs who report all their tips by the book. A bartender earning $35,000 in wages and $15,000 in tips might save $2,000 or more per year on their tax bill, assuming proper reporting. But that is a narrow slice of the labor market: not too poor to owe tax, not too rich to phase out, and perfectly tax-compliant. There is another catch in that, to claim the deduction, both the worker and, if applicable, their spouse must have valid Social Security numbers. That rules out many immigrant workers, particularly those in mixed-status households. Equity and Distortions At first glance, 'no tax on tips' reads like a gesture of economic respect to service workers. In practice, it is a policy that distorts how compensation is structured and who gets rewarded for what kind of work. In short, it picks winners and losers. Two workers earning $50,000 a year could face very different tax bills depending on whether some of that income came as tips. And yet, tip income and wage income each spend equally. This violates basic horizontal equity—the principle that similar taxpayers should shoulder similar tax burdens. As with the overtime deduction, the tips deduction doesn't say 'work matters;' it says how you get paid matters more than what you get paid. Employers now have a new incentive to lean into tip-based compensation, and lower base wages. This disincentivizes employers from providing stability for their workers and could put more workers at the mercy of customer generosity. Some employers may even reclassify service charges or performance bonuses as 'tips'—pushing compliance boundaries in the hope of creating deductible income for workers. At the same time, workers will face the opposite pressure. The more they can convert income into voluntary tips, the more tax they avoid. That's not just an incentive for dishonesty; it's an invitation to creative classification and perhaps a shift in employment. In a gig economy already rife with precarity and underreporting, this could widen the gulf between what workers earn and what they disclose. While the policy may feel like a reward for hustle, much like its overtime cousin, it quietly erodes the wage floor, complicates enforcement, and pushes a compensation model that depends on customer generosity rather than employer obligation. Policy Tradeoffs and the Politics That Drive Them The 'no tax on tips' provision may cost less than the overtime deduction—early estimates suggest perhaps as little as just tens of billions of dollars—but it still represents a diversion of public funds. Every dollar spent subsidizing voluntarily-reported tip income is a dollar not spent in service of raising the minimum wage or providing a refundable benefit that can assist the broader service economy. Instead of lifting wages systemically, Congress is opting to privilege a narrow slice of income for a narrow subset of workers, conditioned on proper paperwork. Politically, however, it is bulletproof. You don't lose elections by giving tax breaks to waiters. It polls well, headlines even better, and offers lawmakers an easy applause line to show support for the working class. Most importantly, it asks nothing of employers. And yet, no one wants to admit what 'no tax on tips' really is: a tax code preference for irregular, customer-subsidized income over salary; a subsidy for volatility over stability; and an incentive for gratuities at the expense of guarantees.
Forbes
14-07-2025
- Business
- Forbes
Two Big Tax Changes That Could Hit Working-Class Households Under Trump's 'Big Beautiful Bill'
Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations. The sweeping Big Beautiful Bill passed this July includes several household-level tax changes that could reshape how many working-class Americans manage their money. Among them: a win for service workers who earn tips or log extra hours, and a new cost for those supporting loved ones overseas. The tip and overtime tax break offers meaningful relief to working-class individuals by reducing the taxable portion of their most variable, and often essential, earnings. For restaurant servers, bartenders, rideshare drivers, and anyone logging long shifts, the headline item is a deduction that wipes out federal income tax on up to $25,000 a year in combined tips and overtime wages ($12,500 for single filers). Congress made the deduction temporary, available only from 2025 through 2028, so eligible workers must claim it yearly on their Form 1040 . The write-off applies to federal income taxes only; Social Security and Medicare payroll taxes still apply. For example, a married bartender who reports $18,000 in tips and earns $4,000 in overtime can deduct the full $22,000. At the 12% federal bracket, that's roughly $2,600 back in the pocket next April. The Journal of Accountancy notes that the deduction dovetails with other extensions of the 2017 Tax Cuts and Jobs Act, making the break possible without rewriting payroll software from scratch. The second consumer‑facing change is tougher news for anyone wiring money to friends or family overseas. A new 1% excise tax will be imposed on outbound remittance transfers funded by cash, money orders, cashier's checks, or similar physical instruments, starting January 1, 2026. Consumers using remittance transfer providers will pay the tax directly. In contrast, these providers are required to collect and remit the funds to the IRS every quarter. The fine print matters. According to tax‑advisory firm Taxes for Expats, the levy applies when the sender funds the transfer with cash, money orders, or cashier's checks. Bank‑to‑bank ACH payments and debit or credit‑card transactions escape the charge for now, although the Treasury secretary can widen the net if compliance problems crop up. The new 1% remittance fee imposes an added financial strain on working-class immigrant households, many of whom regularly send a portion of their earnings abroad to support family members. Forbes Advisor highlights a handful of strong options worth comparing on coverage, cost and reputation: Filing taxes can be time consuming, but online tax tools have made it easier for individuals to file accurately and efficiently from the comfort of their homes. Here are some of the best tax software that can help you simplify your filing process: TaxSlayer Premium: TaxSlayer Pro is a great option for freelancers who need more guidance filing their taxes. The Premium version offers access to a tax professional for assistance with questions you may have. TaxSlayer Pro is a great option for freelancers who need more guidance filing their taxes. The Premium version offers access to a tax professional for assistance with questions you may have. Cash App Taxes: Paying to file your taxes can feel like an extra burden on your finances, so that's where Cash App Taxes come in. You do have to enter all information manually, but the free tool allows you to file both federal and state returns for those who qualify. Paying to file your taxes can feel like an extra burden on your finances, so that's where Cash App Taxes come in. You do have to enter all information manually, but the free tool allows you to file both federal and state returns for those who qualify. Jackson Hewitt Online: Although this tool isn't free, you can choose from their DIY $25 or tax pro $49 option. The tool is easy to use, and if you want in-person assistance, you can visit one of their locations found throughout the country. The Big Beautiful Bill gives many tipped and hourly workers a meaningful, temporary boost in take‑home pay. At the same time, it adds friction to cross‑border money transfers, a trade‑off lawmakers insist is necessary to fund other parts of the package. Before you celebrate or panic, run your numbers: Employees: Keep pay stubs and tip logs. The break only helps if you document every dollar. Keep pay stubs and tip logs. The break only helps if you document every dollar. Senders: Shop around. Switching to an online ACH transfer could entirely erase the new tax in some cases. As always, talking to a tax professional who understands your situation is a good idea. Planning now could help you keep more of your paycheck, whether working in the U.S. or supporting family abroad.
Washington Post
09-07-2025
- Business
- Washington Post
Trump's tax law includes a $40,000 SALT cap. Here's who qualifies.
The new GOP tax law quadruples how much people can deduct in state and local taxes off their federal returns, offering significant relief to high earners in many Democratic-led states by partially undoing a big change in President Donald Trump's 2017 law. That 2017 law, the Tax Cuts and Jobs Act, limited the deduction to $10,000 a year, imposing a cap for the first time as a way of reducing the bill's overall cost. Residents of high-tax states — and their representatives in both parties in Congress — had sought to raise the limit since then. But the push this year set off a major fight within the GOP, as most beneficiaries of the change are in Democratic-run areas.
Yahoo
08-07-2025
- Business
- Yahoo
Trump's new law cuts both ways for Social Security beneficiaries
The Trump administration has claimed that the recently passed tax and spending bill "delivers on President Trump's promise of no tax on Social Security." Experts say it's not that simple. The provision, part of the nearly 900-page One Big Beautiful Bill Act that was signed into law on July 4, creates a new tax deduction for seniors age 65 and up, offering $6,000 in deductions for single filers and $12,000 for married couples. White House and Social Security Administration officials have framed the new deduction as an elimination of taxes on Social Security benefits — a campaign promise made by President Trump — but experts point out that the new deduction can be used by seniors on any income, not just Social Security benefits. A recent analysis by the White House's Council of Economic Advisers found that 88% of beneficiaries will not pay taxes on their payments under the measure. This is because their deductions will be greater than their taxable benefits. READ MORE: Trump's megabill passed — here's what advisors should know Due to current income and tax thresholds, financial advisors say benefits from the deduction will be felt mostly by middle-income seniors. For single filers, the deduction applies to those earning up to $75,000 annually, phasing out thereafter and disappearing entirely at $175,000. For married couples, these thresholds are $150,000 for the start of the phase-out and $250,000 for its complete disappearance. The deduction will have no impact on roughly half of all beneficiaries, who already pay no taxes on their benefits, according to the Center on Budget and Policy Priorities. Tax-paying beneficiaries who fall under the deduction's income limits would also not see any benefit if they are younger than 65. Despite its limitations, Social Security Commissioner Frank Bisignano was quick to celebrate the new deduction. "This is a historic step forward for America's seniors," Bisignano said in a statement. "For nearly 90 years, Social Security has been a cornerstone of economic security for older Americans. By significantly reducing the tax burden on benefits, this legislation reaffirms President Trump's promise to protect Social Security and helps ensure that seniors can better enjoy the retirement they've earned." Monica Dwyer, senior vice president at Harvest Financial Advisors in West Chester, Ohio, said that the deduction is "definitely not in line with Trump's campaign promise of no more taxes on Social Security." READ MORE: As Social Security claims surge, young investors brace for its absence "The One Big Beautiful Bill gives most of its tax breaks to people who don't need it and is going to hurt us in the future in terms of our ability to take the benefits that we were promised and have paid into for most of our lives when we're at the age of being able to collect Social Security benefits," Dwyer said. The new deduction, combined with an expansion of the 2017 tax cuts, will accelerate the insolvency of the Social Security Old-Age and Survivors (OASI) trust fund from early 2033 to late 2032, according to the nonprofit, nonpartisan Committee for a Responsible Federal Budget. Cuts to Social Security benefits will also be deeper than previously estimated, with the committee estimating a roughly 24% reduction in benefits in 2032. "The ironic part is by virtue of reducing tax revenue — largely from Social Security benefits but not exclusively — this bill indirectly affects the funding of the program and exacerbates the shortfall," said Tyson Sprick, a financial advisor at Caliber Wealth Management in Overland Park, Kansas. "There are many ways to fix the issue, but Congress keeps kicking the can down the road, and we're running out of road." Numerous advisors said that many of their clients would see little, if any, benefit from the deduction due to their high income. However the new provision does present some potential benefits for clients who fall within or close to the outlined income limits. "We have just begun having conversations with clients about the potential implications of this provision of the new bill," said Robert Ingram, a financial advisor at Center for Financial Planning, an RIA in Southfield, Michigan. READ MORE: How to fix Social Security's pending shortfall, according to advisors The deduction, which is only in effect for tax years 2025 through 2028, could drive some retirees to temporarily reduce their income in an effort to take advantage of the deduction, Ingram said. Alternatively, some retirees may want to consider taking larger distributions while the deduction is still active to reduce their tax liability on capital gains. That strategy could be especially beneficial for middle-income retirees, Sprick said. "For those in the middle, I think it provides an opportunity to potentially have more room at attractive, low tax rates to realize capital gains — potentially at 0% — or to do Roth conversions," Sprick said. "This would apply regardless of whether you're currently receiving Social Security benefits." 擷取數據時發生錯誤 登入存取你的投資組合 擷取數據時發生錯誤 擷取數據時發生錯誤 擷取數據時發生錯誤 擷取數據時發生錯誤
Forbes
07-07-2025
- Business
- Forbes
No Taxes On Social Security Is A Promise Only Partially Kept
No taxes on Social Security is a promise only partially kept. When it comes to tax news, but especially when it comes to tax law, it's important to always read the fine print. Both and the Social Security Administration issued press releases following the passage of the One Big Beautiful Bill Act that told America's seniors that the Trump administration delivered on its 'no taxes on Social Security' promise. The devil, however, is in the details, and the details tell a different story. Line 6 of Form 1040 is where taxpayers report their taxable Social Security Benefits. Taxpayers report their gross taxable benefits on Line 6a and the taxable portion of their benefits on Line 6b. Most tax software calculates the taxable portion of the benefits automatically; taxpayers who do their taxes on paper, by hand, use a worksheet in the Form 1040 instructions. In any case, one would think that if there was no longer a tax on Social Security, the IRS would be getting busy revising Form 1040 to remove Line 6 and to remove the worksheet from the instructions. That isn't going to happen. Why? Because that isn't how the new law works. The New Senior Deduction Rather than removing Line 6 from Form 1040, the new law adds a new $6,000 deduction for seniors (age 65 and over). The deduction is up to $12,000 for jointly filed returns (both spouses must be qualifying seniors age 65+). In other words, if a taxpayer starts taking Social Security at 62, they do not get this deduction. The amount of the deduction is reduced by 6% for any income that exceeds $75,000 (or $150,000 for jointly filed returns). Single seniors with income of $175,000 (or married filers with $250,000 of income) are completely phased out of the deduction. The deduction is also temporary. The law reads 'In the case of a taxable year beginning before January 1, 2029…' That means that this deduction is valid for tax years 2025 through 2028 only unless Congress extends it. The New Standard Deductions The Tax Cuts and Jobs Act increased the standard deduction but removed personal exemptions starting in 2018. Those changes were supposed to sunset at the end of this year. The new legislation makes the larger standard deduction and the removal of personal exemptions permanent. The new senior 'deduction' is actually a temporary senior exemption based on its location in the tax code. Late last year the IRS announced that the standard deduction for tax year 2025 would be $15,000 and the additional standard deduction for the aged (65+) or the blind would be $1,600. The new law increases the standard deduction to $15,750 for 2025 and the additional standard deduction to $2,000. Consequently, all taxpayers get an additional $750 in standard deduction and seniors (and the blind) get a further $400 each over the original 2025 amounts. The New Math Both increases to the standard deductions are factored into the tax math on The article notes 'the current average retirement benefit' is approximately $24,000. According to the Social Security Administration, the average gross monthly benefit (before Medicare premiums are withheld) is $1,976 (or $23,712 per year). Had the OBBBA not passed, most senior taxpayers would have $16,600 in standard and additional deductions. Under the OBBBA, the amount is $23,750 assuming the senior meets the age and income requirements. The amount is $17,750 for social security beneficiaries who are not yet age 65 and who, consequently, do not get the additional $6,000 senior exemption. Because $23,750 in deductions is enough to offset the average Social Security benefit amount, both the President and the Social Security Administration consider this math 'Promises made, promises kept.' At least the promise appears to be kept for low- and middle-income seniors age 65 and over. Nevertheless, once the entirety of the law surrounding the new deduction is considered, it is clear that 'no taxes on Social Security' is not a blanket exemption. Further, self-congratulatory crowing aside, the truth is that most low-income seniors already do not pay taxes on their Social Security benefits. For example, a single senior whose only income is the average Social Security benefit would not have any taxable income at all according to the Form 1040 Social Security Benefits Worksheet. Even a taxpayer whose Social Security benefits were $75,000 would pay no tax (under any legislation) if Social Security was their only income (and they weren't subject to any other Form 1040, Schedule 1 adjustments). Often, however, many low- and middle-income taxpayers have income other than Social Security, such as a small pension or interest income. Consider a single senior with $18,500 per year in pension income and $500 per year in interest on top of the $24,000 in Social Security benefits. According to the worksheet, $3,000 of the Social Security benefits would be taxable. Add that to the $19,000 in pension and interest income and the taxpayer has $22,000 in adjusted gross income. Had the standard deduction and additional standard deduction remained at the original amounts for 2025, the taxpayer would have $5,400 in taxable income subject to a 10% tax rate. The taxpayer would pay $540 in income tax. Under the newly legislated standard and additional standard deductions, the taxpayer would have $4,250 in taxable income and would pay $425 in tax for a tax savings of $115. Adding in the additional senior exemption deduction means that this taxpayer has no taxable income at all (the deductions offset all of the taxpayer's AGI). Again, however, the taxpayer must be over age 65 to get that last $6,000 deduction. Consequently, while 'no taxes on Social Security' is not a permanent blanket exemption, many taxpayers will receive some modest tax relief as a result of the new legislation—at least through 2028.
