By: Nick Richards, Esq. , Sabrina Strand, Esq. , and Tatum Perez, Esq.
The current federal budget proposal includes many new and novel approaches to fund our federal government together with large cuts to government programs like Medicaid and the elimination of taxes on tips, overtime pay and other sources of income. The process continues to unfold but is gaining speed with the passage of the Big Beautiful Bill out of committee and the U.S. Senate’s passage of the No Tax on Tips Act. So, as we approach the finish line, what changes should we expect to see?
Are Tips Taxable?
Tips are still taxable. But, in a surprising move, the U.S. Senate just passed the “No Tax on Tips Act,” by a vote of 100-0; no senator on either side of the political aisle objected. The bill will now head to the U.S. House of Representatives for consideration. If the bill becomes law, it could mean that millions of tipped workers get to keep more of what they earn, at least when it comes to cash tips.
Under the current law, tip earners are required to report all tips to their employer if they total $20 or more in a single month. Employers then include the tips in employee paycheck calculations, withholding federal income tax, Social Security tax, and Medicare taxes.
If the No Tax on Tips Act becomes law, tip earners who report their tips to an employer, will still see the tips they receive included in the total income reported to the IRS. But – they will be able to deduct up to $25,000 of those tips. The deduction is meant for workers making up to $160,000 a year – adjusted for inflation. If passed, the U.S. Department of Treasury has 90 days to publish a list of eligible occupations. Some examples of eligible occupations could include servers, bartenders and delivery drivers.
The bill would also expand the business tax credit “for the portion of payroll taxes that an employer pays on certain tips to include payroll taxes paid on tips received in connection with barbering and hair care, nail care, esthetics, and body and spa treatments,” according to the bill’s description page.
What a “Tariff-Funded Tax Cut” Could Mean for American Workers
Twenty-first-century Americans were not used to hearing the word “tariff ” every day—until now. Today – tariffs are a common subject in political headlines and cable news segments because of President Trump’s repeated claims that they are necessary to restore balance with our trade partners. Time will tell if he is right – but what are tariffs?
A tariff is a “tax” on imported goods. The current administration’s proposed tariffs, particularly those aimed at China, are designed to fund domestic tax cuts and reduce government reliance on income taxes by increasing import taxes on foreign goods. The goal is often to protect domestic industries from foreign competition and to raise revenue. Many argue, however, that tariffs are a double-edged sword: while they may fund tax cuts or encourage domestic production, they also tend to raise consumer prices and can spark trade retaliation from other countries.
Using tariffs to replace lost income tax revenue is unusual and controversial, since the burden of tariffs falls broadly on consumers (who are often lower- and middle-income households), through higher prices on everyday goods. Although the idea of paying no income tax is very appealing to most taxpayers, the use of tariffs may just shift where a taxpayer’s money is spent. Lower income taxes, but higher cost of living, may be a zero sum game for many people.
What Tax Cuts Will Americans See in the Short Term?
As the tariff drama continues, there are some measures currently contemplated to roll out initial income tax reduction measures. Some of the tariff conversation involves real proposed policy shifts that could impact personal finances in a big way. The current administration has proposed using tariffs to eliminate federal income taxes on overtime pay, tips, and Social Security benefits. Funding these tax cuts may involve a combination of tariffs, spending cuts, and tax increases on high earners. The legislative path forward includes navigating budgetary constraints and political opposition.
The Big Beautiful Bill, as President Trump calls his budget proposal, should include provisions to expand the Child Tax Credit, exempt tips and overtime pay from tax, drastically cut Medicaid funding, eliminate tax on interest for American made cars, and it may drastically increase the national debt.
Preserving Existing Tax Cuts
The Republican proposal would make the 2017 Trump administration tax cuts permanent and fund such cuts through tariffs and by phasing out the clean energy credits passed during the Biden administration. Because the 2017 tax cuts largely benefited top earners and large corporations, the proposal is criticized as a tax cut for the rich in exchange for a clean environment.
Social Security
Currently, retirees pay tax on their Social Security income, if their total income exceeds certain thresholds. President Trump has proposed to eliminate income tax on Social Security benefits and it is expected to be included in the upcoming Big Beautiful Bill. Most people agree that Social Security should not be taxed at all since it is not a tax-deferred benefit.
For example, under current rules, a retiree receiving $24,000 per year in Social Security, plus $18,000 in part-time income could pay tax on up to 85% of the Social Security – $20,400 in this case, because the total income exceeds IRS annual income thresholds.
If the retiree in this example is in the 12% federal tax bracket, that means the retiree could pay up to $2,400 in federal income tax because the retiree continued working part-time or had some retirement savings. These examples do not factor in family size, personal exemptions, or other deductions, which would reduce this number substantially.
Conclusion
The Big Beautiful Bill is an effort to reshape the U.S. tax system and tax burdens according to President Trump’s plan and campaign promises. If passed, the proposed tax relief measures could offer tangible financial benefits for middle-income workers and retirees. However, relying on tariffs as a revenue substitute introduces economic and legal complexities, including potential trade retaliation and increased consumer costs.
For now, these proposals reflect policy intent more than legal certainty. Individuals and businesses should remain attentive to developments, but cautious in assuming these changes will take effect without significant legislative negotiation. A proactive approach to tax planning, informed by current law rather than proposed reforms, remains essential.
Tax planning in the face of such uncertainty can be challenging, but we are here to help. Please reach out to [email protected]
