New tax law updates tip deduction

The tax and spending bill enacted earlier this year by President Trump includes new provisions regarding tips, primarily as a federal income tax deduction for tipped workers. Key aspects for tipped workers:

• Tip Deduction: The law creates a federal tax deduction for “qualified tips” up to $25,000 annually for tax years 2025 through 2028.

• “Qualified Tips”: This deduction applies to cash and credit card tips, but specially excludes mandatory service charges.

• Eligibility: This deduction is available to individuals working in occupations that traditionally and customarily received tips on or before Dec. 31, 2024. The IRS was expected to publish a list of qualifying occupations by Oct. 2.

• Income Limitations: The deduction begins to phase out for single filers with a modified adjusted gross income exceeding $150,000 and for married filing jointly filers with income exceeding $300,000.

• Not a Tax Elimination: It’s crucial to understand this is a deduction, not an elimination of taxes on tips. Workers are still required to report their tips, and these earnings are subject to payroll taxes (Social Security and Medicare), as well as state and local taxes.

• Reporting requirement: To qualify for the deduction, tips must be properly reported, meaning employers must report them on forms like W-2s, and provide statements to employees showing the amount and occupation in which the tips were received.

It is important that workers understand the parameters of the new law.

Barry Lisak is an IRS enrolled agent specializing in personal and small business taxes for 30 years. Any questions can be directed to him at 516-829-7283, or mrbarrytax@aol.com.