Summary of H.R. 482 - "No Tax on Tips Act"

What is this bill about?

This bill aims to change how tips that workers receive are treated when it comes to income taxes. Specifically, it proposes that people do not have to pay income tax on certain "qualified tips" by allowing them to take a tax deduction equal to the amount of those tips.

Key Points in Simple Terms

1. No income tax on qualified tips

The bill allows workers to deduct an amount equal to the cash tips they receive at work from their taxable income, meaning they won’t owe income tax on those tips, up to $25,000 each year.

2. What are qualified tips?

• Tips received in jobs where tipping is customary and traditional as of the end of 2023. For example, servers, bartenders, taxi drivers, hairdressers, etc.
• This deduction does NOT apply to workers who earn very high wages from the same employer (above a certain threshold defined by tax rules).

3. List of qualifying jobs

The Treasury Department must publish a list of eligible occupations within 90 days after the bill becomes law. This list will clarify exactly which jobs qualify for this tip deduction.

4. Deduction available to everyone

This tax deduction will be available to all taxpayers, including those who take the standard deduction (people who do not itemize deductions).

5. Simplified tax filing

Tips deducted under this bill won't be subject to many of the usual restrictions and limits that affect other deductions. Additionally, tax withholding procedures will be updated to reflect this change, making withholding and filing easier and fairer for tipped workers.

6. Effective date

The bill applies to tax years starting after December 31, 2024.

7. Extension of social security tax credits

The bill also extends certain employer tax credits related to Social Security taxes on tips to include beauty service establishments—such as barbershops, nail salons, spas, etc.—where tipping is customary.

Why does this matter?

Currently, tips are considered taxable income, which means tipped workers must pay taxes on them just like regular wages. This bill recognizes that paying taxes on tips can be a heavy burden and aims to reduce the tax load on these workers by allowing a significant deduction equal to their tips.

This would potentially put more money back in the pockets of workers who rely on tips as a substantial part of their income, such as restaurant servers and beauty service employees.

In short:

• If you get tips as part of your job (in places where tipping is "normal"), you won't have to pay income tax on your tips, up to $25,000 a year.
• Your employer and the IRS will have clear rules about which jobs qualify.
• The change helps both workers and employers, by simplifying tax handling of tips and extending tax credits to beauty service businesses.
• This law would take effect starting with the 2025 tax year.

If you or someone you know works in a tipped occupation, this bill could mean more take-home pay and simpler tax paperwork starting next year!