a campaign promise turns into tax code reality—but only for a limited time.
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quick tax tip
with art werner
cpe today
on the latest quick tax tip, tax guru art werner unpacks one of the buzziest provisions tucked into the “one big beautiful bill”: the partial exemption of tips from taxation.
during their campaigns, both former president trump and vice president harris floated the idea of eliminating taxes on tips. now, some of that rhetoric has made its way into law—but with caveats that every taxpayer, accountant, and employer in the hospitality sector needs to understand.
the new provision is retroactive to 2025 and remains in effect only through 2028, unless congress chooses to extend it. that means servers, bartenders, hair stylists, and others in tip-driven professions may see real short-term relief.
but this isn’t a blanket “no-tax” on all tips. the benefit phases out for individuals earning more than $160,000 in 2025 (adjusted annually for inflation). notably, that income threshold includes both wages and tips—and for joint filers, combined household income could easily push them out of eligibility.
“people say, ‘well, who’s making that kind of money as a server?’” werner notes. “but think of dual-income households, or high-end hospitality roles like a maître d’. those individuals may cross the line and lose the benefit.”
to qualify, the tips must be from occupations where tipping is “traditionally and customarily received.” that means taxpayers can’t game the system by reclassifying fees as tips in unrelated professions.
werner gives a tongue-in-cheek example: “you can’t say, ‘i’ll prepare a tax return for $100, but the customary tip is $300.’ that won’t fly.”
although some skeptics argue that many cash tips already go unreported, the irs has long had procedures in place for auditing tip income. werner suggests that this provision may actually reduce enforcement burdens by formalizing partial relief for service workers, rather than trying to chase down every dollar.
for those working in industries where tipping constitutes a significant portion of their income, this temporary exemption could provide much-needed breathing room. but the four-year sunset clause means accountants will need to guide clients carefully through the shifting landscape.
“this is a benefit for certain people—but it comes with limits,” werner cautions.