Tip Tax Termination Act: Service Workers Get a Tax Break on Tips Up to $20,000, Starting 2025

The "Tip Tax Termination Act" aims to give service industry workers a significant tax break. Specifically, it allows individuals in fields like cosmetology, hospitality, and food service to exclude up to $20,000 of their tip income from their gross income for tax calculations. This means less of their hard-earned money goes to taxes.

Cash in Hand

The core change is straightforward: For five years, starting January 1, 2025, and ending December 31, 2029, eligible tipped workers won't have to pay federal income tax on the first $20,000 they earn in tips. The bill specifically mentions roles where tipping is customary, such as those in restaurants, salons, and hotels. The Secretary of the Treasury is tasked with updating tax withholding procedures to reflect this change, so workers should see the difference in their paychecks.

For example, imagine a bartender who makes $30,000 a year in base salary and another $25,000 in tips. Under current law, they're taxed on $55,000. With this new bill, they'd only be taxed on $35,000 ($30,000 base + $25,000 tips - $20,000 exclusion). That's a considerable chunk of change back in their pocket. This is a pretty big benefit for those who rely on tips, potentially boosting their take-home pay and giving them a bit more financial breathing room. However, it is important to note that the bill states that this exclusion cannot be used for other deductions or credits, except for the child tax credit and earned income credit (Section 2).

The Five-Year Itch

While this sounds like straight-up good news for tipped workers, there are a couple of things to keep in mind. First, it's temporary. The exclusion only applies for five years. This could create some uncertainty down the line. What happens in 2030? Will workers suddenly face a larger tax bill? It's a question that will need answering as the end date approaches. Second, because this bill only applies to some professions, it does raise the question of fairness. Why should a waiter get a tax break on their tips, but not, say, a teacher or a construction worker on their bonuses?

Bottom Line

This bill is a targeted tax cut for a specific segment of the workforce. It's likely to be welcomed by those in tipped industries, but its temporary nature and potential to create perceived inequities are worth watching. The real-world impact will depend on how businesses and workers adjust to the new rules, and whether it leads to any long-term changes in tipping practices or tax policy.