Senate Approves Tax Break for Tipped Workers
This week, the Senate announced a revision of a tax proposal known as “One Big Beautiful Bill,” put forth by President Donald Trump. There are mixed opinions about whether this is better for the average American compared to a similar bill passed by the House.
The Senate’s version maintains some broad benefits, such as no taxes on overtime or tips, additional credits for taxpayers over 65, and deductions for state taxes.
Yet, some accountants express skepticism, suggesting these changes might not actually benefit individual taxpayers.
No Taxes on Tips and Overtime Pay
One of Trump’s key promises—eliminating taxes on tips and overtime—remains in the Senate’s proposal, but it comes with limitations. Workers would be able to deduct up to $25,000 of tips and overtime from their taxable income, but this deduction will begin to decrease above certain income thresholds. Specifically, for adjusted gross incomes (MAGI) over $150,000 for individual filers and $300,000 for couples, the deduction will drop by $100 for each additional $1,000 earned beyond these limits.
Unlike the Senate’s plan, the House version has no phase-outs and instead excludes higher earners from benefiting at all, specifically those making at least $160,000.
Richard Pont, a CPA from San Francisco, mentioned, “The House version is more beneficial to the average taxpayer because it eliminates the cap on deductions.” That clearly has its appeal.
Bonus Deductions for Seniors
The Senate has also suggested a $6,000 bonus deduction for seniors aged 65 and older, though eligibility is capped at $75,000 for single filers and $150,000 for couples. This bonus can be claimed from 2025 to 2028 and is intended to complement existing standard deductions for seniors. In that same timeframe, a single filer over 65 could claim an extra $2,000, while couples could add $1,600 for each spouse over 65.
The House’s plan, on the other hand, proposes a $4,000 bonus deduction with similar eligibility and duration.
However, analysts warn that those who pay little or no federal tax may not benefit from the bonus deduction at all since tax credits reduce taxable income directly.
Concerns Over SALT Deductions
Taxpayers may face significant drawbacks under the Senate’s version regarding state and local tax (SALT) deductions. In 2017, Trump’s initial tax reforms limited SALT deductions to $10,000, a cap many argue puts a burden on taxpayers in states with high local taxes, such as New York.
To navigate this, several states have adopted a pass-through entity (PTE) tax structure allowing entities to pay state taxes but limiting individual deductions. The House plan aims to raise the SALT cap to $40,000 for those earning under $500,000, while the Senate proposes to retain the current $10,000 cap.
Some, like Pon, suggest that while there may be a modest increase in the cap for married filers, passing proposals that would stop circumventing the PTE limitations is less likely given the fiscal landscape.
