President Donald Trump’s recent tax initiative, known as the “no tax on tips” deduction, is set to create potential financial planning opportunities for certain workers. This provision, part of Trump’s comprehensive tax reform package, allows eligible employees to deduct up to $25,000 in “qualified tips” from their taxable income annually between 2025 and 2028.
In August, the U.S. Department of the Treasury released an initial list of 68 occupations that “customarily and regularly received tips” as of the end of 2024. However, experts caution that the eligibility of these jobs may vary, suggesting that it’s premature for workers to take significant tax-related actions based on this list. Thomas Gorczynski, an enrolled agent based in Tempe, Arizona, advises individuals to refrain from making major financial moves until clearer guidance is provided.
Melanie Lauridsen, vice president of tax policy and advocacy at the American Institute of Certified Public Accountants, emphasized the need for further clarification from the IRS and Treasury, expected to be released by early October. The current ambiguity makes it challenging for tax professionals to assist clients with year-end tax planning decisions. Lauridsen warned that making assumptions about the deduction could lead to risky financial decisions.
While some occupations from the preliminary list may qualify for the deduction, others may not. For instance, those in “specified service trades or businesses” (SSTB) will not be eligible. The SSTB classification, defined in Trump’s 2017 tax legislation, includes professions in health care, legal, financial services, performing arts, and sports, among others. Furthermore, whether an individual is employed as a W-2 worker or self-employed could also affect their eligibility for the deduction.
Given the uncertainty surrounding the “no tax on tips” deduction, many workers find themselves unsure about their year-end tax planning strategies. One possible avenue for preparing is to reduce modified adjusted gross income (MAGI) to ensure qualification for the deduction. The tax break phases out for those with a MAGI exceeding $150,000.
Additionally, self-employed individuals may want to consider the implications of retirement savings contributions, as it is currently unclear whether such contributions will impact net business income and, consequently, the tips deduction. Gorczynski notes the importance of understanding and maximizing tax breaks for sole proprietors, but further guidance is essential to navigate this complex landscape effectively.
For workers listed in the Treasury’s preliminary list who do not fall under the SSTB category, grasping the law’s nuances is crucial. Consulting with a tax professional or financial advisor may prove beneficial as more details emerge, helping workers make informed decisions as they prepare for the upcoming tax years.
