I feel like this is mostly for show and morale. And for some people whose income from tips is substantial, not including tips in income could actually make their income too low for some tax benefits, that is unless they provide a work around to include it for calculation of those credits. For example, the refundable part of the Child Tax Credit requires income above $2500 and is only 15% of the income amount over $2500. For some low income workers, those tips help raise their income enough to qualify for tax credits. Just some thoughts from a tax professional.
There are more than a few details to be filled in which could expand or eliminate the potential benefits of excluding tip income from taxes.
A quick thumbnail calculation suggests that reducing AGI by removing tip income would expand the number of people who would qualify for the Earned Income Credit, and expand the amount people receive from the EIC.
Does that make the passage of the bill more substantive than performative? Not at all. What this does is put the onus on the House to deal with the issue--which it necessarily is going to have to do as part of grappling with the One Big Beautiful Bill, either directly or in reconciliation.
That explains why the bill passed the Senate by affirmation. The Senate has no reason on either side of the aisle to vote against the bill. In terms of both intra-party and inter-party politics, it works to the Senate's advantage to pass the legislation.
However, on a longer horizon, a tax policy of excluding tip income and thereby broadly easing the tax burden of younger workers I believe will result in long-term economic benefits. A reduced tax burden makes it easier for younger workers to get themselves established economically, and to pursue the sort of educational opportunities which can add substantially to their income potentials over time.
That the industries where tips are common are also among the industries where many youth get their first job experiences makes any long-term reduction in their tax burden an improvement in their economic stability. That in turn will have positive impacts on their prospects for personal income growth.
For the present Congress, the assessment that this is mainly for show and morale is not without merit. Even so, as a long term shift in tax policy I think there are benefits to the idea.
Reducing taxes is good, but I’m not sure how much it will help without other big changes. My preference would be to scrap the whole IRS code and start fresh.
Good news. Peter, have you seen any forecasts on how the House will vote?
Also, we don’t know how this will affect revenue for the government. They may have accurate info on the percentage of employees who receive tips, but not on how much of those tips are reported as income. For example, even if I pay a bill with a credit card, I almost always tip in cash. This is because some employees don’t receive their tip income from their employer until the end of the month, or whenever the employer gets the credit card income, and I want the people I tip to receive their benefit of my tips right away. It then is entirely up to them if they are “honest” in reporting this income, so the government can steal it.
So, Peter, I would find it interesting if you’ve got any estimates. If the no-tax-on-tips bill passes, and doesn’t reduce government revenue by much, politicians may decide the political benefit of more tax exclusions is worth it!
I agree! And Peter, if this bill passes, but you find out that it doesn’t apply to Ko-fi tips, please let us know. Obviously the tip I gave you this weekend was meant as a birthday gift, and if the government is going to continue to tax it, I will start mailing you a check in a birthday, Christmas or Festivus card from now on. The only reason I’ve used Ko-fi is because I don’t know if the amount of Ko-fi tips is a factor in Substack’s algorithm.
My suspicion is that Ko-Fi and Patreon-style "tips" are not going to be covered by this legislation.
Either way, don't worry about it. Individual content creators are always going to have to sort out the tax consequences of various compensation models for themselves. The tax impact of such things is always going to be my problem to resolve, not yours.
"Cash tip" includes a tip paid on a credit card. With so many transactions concluded in something other than legal tender it would be absurd to restrict it to actual cash.
What will the impact of this legislation be in terms of tax revenue? That is difficult to say. Direct impacts are likely to be a small reduction in tax revenue, and I suspect an increase in payments of the EIC as well.
However, the long-term benefits of easing the tax burden on younger workers, which arguably would help them complete various educational programs and job training programs, could be quite substantial by increasing the value-add of younger workers, and that would actually increase government tax revenue by growing the tax base.
It is a well-established economic and tax policy reality that growing the tax base does more to raise tax revenue over the long haul than increasing tax rates.
Despite what the nay-sayers and policy wonks might say about this legislation, I think it is a long-term good idea.
I feel like this is mostly for show and morale. And for some people whose income from tips is substantial, not including tips in income could actually make their income too low for some tax benefits, that is unless they provide a work around to include it for calculation of those credits. For example, the refundable part of the Child Tax Credit requires income above $2500 and is only 15% of the income amount over $2500. For some low income workers, those tips help raise their income enough to qualify for tax credits. Just some thoughts from a tax professional.
There are more than a few details to be filled in which could expand or eliminate the potential benefits of excluding tip income from taxes.
A quick thumbnail calculation suggests that reducing AGI by removing tip income would expand the number of people who would qualify for the Earned Income Credit, and expand the amount people receive from the EIC.
Does that make the passage of the bill more substantive than performative? Not at all. What this does is put the onus on the House to deal with the issue--which it necessarily is going to have to do as part of grappling with the One Big Beautiful Bill, either directly or in reconciliation.
That explains why the bill passed the Senate by affirmation. The Senate has no reason on either side of the aisle to vote against the bill. In terms of both intra-party and inter-party politics, it works to the Senate's advantage to pass the legislation.
However, on a longer horizon, a tax policy of excluding tip income and thereby broadly easing the tax burden of younger workers I believe will result in long-term economic benefits. A reduced tax burden makes it easier for younger workers to get themselves established economically, and to pursue the sort of educational opportunities which can add substantially to their income potentials over time.
That the industries where tips are common are also among the industries where many youth get their first job experiences makes any long-term reduction in their tax burden an improvement in their economic stability. That in turn will have positive impacts on their prospects for personal income growth.
For the present Congress, the assessment that this is mainly for show and morale is not without merit. Even so, as a long term shift in tax policy I think there are benefits to the idea.
Reducing taxes is good, but I’m not sure how much it will help without other big changes. My preference would be to scrap the whole IRS code and start fresh.
Elon Musk's chain saw needs to run amok across the tax code and really the whole of the US Code, not to mention the Code of Federal Regulations.
Scrap it all and only pass back into law what is truly compelling and necessary (which won't be much!)
Good news. Peter, have you seen any forecasts on how the House will vote?
Also, we don’t know how this will affect revenue for the government. They may have accurate info on the percentage of employees who receive tips, but not on how much of those tips are reported as income. For example, even if I pay a bill with a credit card, I almost always tip in cash. This is because some employees don’t receive their tip income from their employer until the end of the month, or whenever the employer gets the credit card income, and I want the people I tip to receive their benefit of my tips right away. It then is entirely up to them if they are “honest” in reporting this income, so the government can steal it.
So, Peter, I would find it interesting if you’ve got any estimates. If the no-tax-on-tips bill passes, and doesn’t reduce government revenue by much, politicians may decide the political benefit of more tax exclusions is worth it!
I agree! And Peter, if this bill passes, but you find out that it doesn’t apply to Ko-fi tips, please let us know. Obviously the tip I gave you this weekend was meant as a birthday gift, and if the government is going to continue to tax it, I will start mailing you a check in a birthday, Christmas or Festivus card from now on. The only reason I’ve used Ko-fi is because I don’t know if the amount of Ko-fi tips is a factor in Substack’s algorithm.
My suspicion is that Ko-Fi and Patreon-style "tips" are not going to be covered by this legislation.
Either way, don't worry about it. Individual content creators are always going to have to sort out the tax consequences of various compensation models for themselves. The tax impact of such things is always going to be my problem to resolve, not yours.
"Cash tip" includes a tip paid on a credit card. With so many transactions concluded in something other than legal tender it would be absurd to restrict it to actual cash.
What will the impact of this legislation be in terms of tax revenue? That is difficult to say. Direct impacts are likely to be a small reduction in tax revenue, and I suspect an increase in payments of the EIC as well.
However, the long-term benefits of easing the tax burden on younger workers, which arguably would help them complete various educational programs and job training programs, could be quite substantial by increasing the value-add of younger workers, and that would actually increase government tax revenue by growing the tax base.
It is a well-established economic and tax policy reality that growing the tax base does more to raise tax revenue over the long haul than increasing tax rates.
Despite what the nay-sayers and policy wonks might say about this legislation, I think it is a long-term good idea.