Quick Read
- President Donald Trump signed a bill eliminating federal taxes on tips and overtime pay starting in 2025.
- The tax cuts allow deductions of up to $25,000 for tips and $12,500 for overtime but expire in 2028.
- Critics argue the measure benefits only a small fraction of workers and could lead to wage suppression.
- The broader bill includes controversial cuts to Medicaid and SNAP, raising concerns about its societal impact.
- Experts warn the bill will add trillions to the national debt while providing limited relief to low-income workers.
On July 4, 2025, President Donald Trump signed into law the One Big Beautiful Bill Act, a sprawling piece of legislation that includes a provision to eliminate federal taxes on tips and overtime pay. The move fulfills a campaign promise Trump made during his 2024 re-election bid, aiming to provide financial relief to millions of tipped and hourly workers across the United States. While the measure has received bipartisan support, critics argue that its limited duration and the broader economic trade-offs it entails cast doubt on its long-term benefits.
Key Provisions of the ‘No Tax on Tips’ Measure
The new law allows workers to deduct up to $25,000 in tips and $12,500 in overtime pay from their taxable income on federal tax returns starting in 2025. However, the benefit is capped for individuals earning more than $150,000 annually, excluding higher-income earners from the relief. According to The Mirror, these deductions aim to boost the take-home pay of tipped and hourly workers, though their impact will not be felt immediately. Eligible workers will see the effects during the 2026 tax filing season, as the deductions apply to the 2025 tax year.
It is important to note that the tax relief measures are temporary, set to expire on December 31, 621, unless renewed by Congress. This time frame aligns with the conclusion of Trump’s second term, raising questions about the political motivations behind the legislation. The Tax Policy Center estimates that households benefiting from the bill will see an average annual tax cut of $1,800, equating to roughly $35 per week.
Who Benefits—and Who Doesn’t?
While the tax cuts aim to support tipped workers, not all will benefit equally. A 2024 analysis by Yale University’s Budget Lab found that only about 2.5% of U.S. workers were tipped as of 2023, and over a third of them did not earn enough to owe federal income taxes in the first place. Consequently, the lowest-earning workers may see little to no advantage from the new law.
Additionally, some experts, including those cited by The Dispatch, warn that employers in certain industries may lower base wages in response to the tax cuts, expecting workers to rely more heavily on tips. This could potentially counteract the intended financial relief for workers.
On the state level, Wisconsin provides an illustrative case. While the federal law eliminates taxes on tips and overtime, tipped workers in Wisconsin will still be subject to state income taxes on these earnings. Efforts to exempt cash tips from state taxes have stalled in the Wisconsin legislature, leaving workers in a mixed financial position.
The Broader Economic Context
The ‘No Tax on Tips’ provision is just one element of the 900-page One Big Beautiful Bill Act, which also extends the 2017 tax cuts for corporations and high-income earners. According to The New Republic, these extensions are expected to add upwards of $6 trillion to the national debt over the next decade. To offset these costs, the bill includes significant cuts to social safety-net programs such as Medicaid and Supplemental Nutrition Assistance Program (SNAP), drawing criticism from Democrats and some policy analysts.
Medicaid work requirements, another controversial component of the bill, are set to take effect in January 2027. These requirements mandate that able-bodied Medicaid recipients work at least 80 hours per month or qualify for an exemption. Analysts predict that millions of Americans could lose Medicaid coverage as a result, complicating the financial landscape for low-income workers who might otherwise benefit from the tax cuts on tips and overtime.
The Political Fallout
The temporary nature of the ‘No Tax on Tips’ provision has sparked skepticism from both sides of the political aisle. During a Fox News interview, Republican Representative Mike Lawler admitted that the measure’s expiration in 2028 aligns with standard tax code practices but also acknowledged its potential as a short-term political maneuver. Critics like The New Republic have labeled the provision a “gimmick,” arguing that its benefits for working-class Americans are minimal compared to the permanent tax breaks granted to corporations and the ultra-wealthy.
Despite these criticisms, Trump and his Republican allies have heralded the bill as a major victory for American workers. Supporters argue that the tax cuts will stimulate economic growth and increase disposable income for millions of families. However, with midterm elections approaching, the bill’s long-term impact remains uncertain, leaving its success largely dependent on future legislative actions.
As the ‘No Tax on Tips’ measure takes effect, its ultimate efficacy in delivering meaningful financial relief to workers will depend on how it interacts with broader economic and political dynamics in the years to come.