Restaurant tips or gratuity. Banknotes and coins on a plate.
getty
A recent Wall Street Journal poll reported widespread support for three of President Trump’s campaign ideas that Congress added to the budget bill it passed on July 3rd. While respondents generally opposed the overall law, new tax deductions for tip and overtime income and for older adults were quite popular. But respondents may have been unaware of one key fact: Few will gain from these tax changes.
The Tax Policy Center estimates:
All three tax breaks will be available from 2025 through 2028. Tips and overtime pay still will be subject to payroll taxes.
TPC estimates about 30 percent of households would benefit from all of Trump’s add-ons combined, including deductions for OT, tips, auto loans, and seniors. For all households, these provisions will cut taxes by an average of about $300 in 2026.
On the campaign trail, President Trump framed his policies in simple and bold terms: No taxes on tips. No taxes on overtime. No taxes on Social Security.
While headline writers still describe the changes in the same vivid terms (here and here), the reality is far different. And much less generous.
There are two big reasons.
First, most workers don’t get tips or overtime pay. Second, low-income workers and retirees already pay no federal income tax simply because they make so little money. If you pay no income tax now, all these extra deductions do you no good, no matter how generous they sound.
For example, more than 99 percent of households making less than about $35,000 (the lowest-income 20 percent) gain nothing from the deductions for tips and overtime. Nearly 99 percent of low-income older adults get no help from the senior deduction.
More than that, Congress’s final design of each of these tax cuts further shrinks the number of beneficiaries.
The Tip Deduction
The budget law allows workers to deduct no more than $25,000 in tips. Self-employed workers can deduct only up to their net income from the business where the tips were earned. The deduction starts phasing out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
In addition, only those in occupations where workers “customarily and regularly” received tips in the past will be eligible.
How many tipped workers will benefit from the new deduction? About 60 percent among households that report tipped income from workers who are not dependents. Two-thirds live in households with incomes between $50,000 and $200,000. However, the share of households that benefit falls to about half once you the many dependents who report tipped income, such as students who work part-time.
Keep in mind that TPC analyzed tax benefits only. Many low-income tipped workers may lose Medicaid benefits or Affordable Care Act premium subsidies due to other provisions of the budget law. The Center for American Progress estimates, for example, estimated that more than 500,000 tipped food service workers receive Medicaid.
The Overtime Deduction
The overtime law comes with its own limits. A worker can deduct no more than $12,500 in overtime pay ($25,000 if married). The deduction applies only to the portion that exceeds their regular pay. In other words, if a worker gets time-and-a-half pay, they can only deduct the extra “half.”
The work must meet the Fair Labor Standards Act definition of overtime. And like the tips provision, the OT deduction phases out for taxpayers starting at $150,000 ($300,000 for joint filers). Even with the phase-out, the biggest beneficiaries of the OT deduction are those making between about $217,000 and $460,000. Their taxes will be reduced by $500-$600, or about 0.2 percent of their after-tax income.
The OT deduction will come with other still-unwritten guardrails to prevent employers and employees from gaming the system by designating regular pay as overtime.
The Senior Deduction
The tax break for seniors is entirely different from what Trump proposed when campaigning. Instead of exempting Social Security benefits from tax, it gives some older adults a special deduction against all income.
Overall, TPC estimates fewer than half of older adults will benefit at all. And the average tax cut for all seniors will be about $450. Not nothing, but hardly life changing.
Among seniors, the biggest beneficiaries will be those making between about $130,000 and $190,000 (the highest-income 80 percent to 90 percent). More than 95 percent will benefit from the higher deduction. By contrast, about 99 percent of those making $24,000 or less would get no benefit from the higher deduction.
Estimates of who benefits from the tips and overtime deductions are uncertain, since it ultimately will depend on rules the Treasury Department and the IRS have yet to write. Still, TPC’s analysis provides a good estimate of the number of people who will benefit from Trump’s tax ideas. And there are a lot fewer than people seem to think.
Read the full article here