Trump’s ‘No Tax on Tips’ Deduction Raises Questions over Eligibility and Enforcement

President Donald Trump’s newly enacted tax legislation, described as a “big beautiful bill,” features a high-profile section titled “no tax on tips.” The provision, effective from 2025 to 2028, does not eliminate taxes on tips, but rather introduces a deduction of up to $25,000 for certain qualified workers, subject to income limits and eligibility requirements that remain unclear.

While the name suggests full tax exemption, tips will still be subject to payroll and state taxes. The deduction begins phasing out once a worker’s modified adjusted gross income exceeds $150,000. The Internal Revenue Service is expected to clarify which occupations are eligible by early October.

A waitress serving coffee | Source: Pexels

Experts have voiced concern over the current ambiguity. “We’re looking at a crystal ball” for guidance, said Larry Gray, an IRS liaison and Missouri-based CPA.

Estimates from The Budget Lab at Yale University show that tipped workers accounted for 4 million jobs, or 2.5% of U.S. employment in 2023. However, the deduction excludes several professions outright, such as actors, musicians, directors, and playwrights.

The law defines “qualified tips” as cash or card-based tips voluntarily given by customers, including tips shared through pooling arrangements.

A waitress taking an order | Source: Pexels

Mandatory service charges, such as automatic gratuities, may not qualify. “It’s an entirely voluntary transaction,” said Alex Muresianu of the Tax Foundation. “It’s hard to argue that [mandatory charges] are given voluntarily,” added financial planner Ben Henry-Moreland.

To claim the deduction, tips must be properly reported via official information returns like Form W-2 or 1099. Recent changes to income thresholds for such forms may further complicate eligibility. “The elephant in the room... is, so many tips go unreported to begin with,” said Henry-Moreland.