While the tax changes from the Trump administration have led to larger refunds for many this year, some taxpayers may find themselves receiving less than they anticipated.
According to financial experts, tipped workers could be in for an unexpected twist when filing their taxes.
Why It’s Important
Federal income taxes are due on April 15th.
The recent tax reforms have made notable shifts in how much Americans owe, influencing their refunds as well.
What You Need to Know
This week, the Treasury Department shared that President Trump’s tax cuts are expected to result in an average refund increase of $1,000 per household.
Over 100 million households are expected to receive refunds, with the enhanced child tax credit lowering taxes by about $1,700 for families with two children.
For the 2025 tax year, the child tax credit was raised to $2,200 — factoring in inflation — and the standard deduction was doubled, impacting roughly 90% of taxpayers, according to the Treasury Department.
However, some Americans might be disappointed with their tax refunds.
“It may seem straightforward to say ‘tips are not taxable,’ but that’s not quite the case. Taxpayers could be in for a shock,” noted Alex Bean, a financial literacy instructor at the University of Tennessee at Martin.
“For workers, FICA taxes will still be deducted from paychecks throughout the year, even if their income liability is less at tax time. This could lead to a smaller refund than they expect.”
Drew Powers, who founded Powers Financial Group in Illinois, mentioned that the change to “tip tax exemption” comes with both advantages and drawbacks.
“Most cash tips generally go unreported; that’s just how it is,” he said. “And ‘no’ doesn’t always mean ‘no’ in this case. Tax savings only apply to federal income taxes, while payroll taxes — like the 8% burden — remain, along with potential state and local taxes.”
People’s Opinions
Alex Bean elaborated, saying, “Those who adjust their withholdings as if they’ll reap the full benefit might unexpectedly owe money. Often, tax reforms sound simpler in headlines than they truly are.”
Kevin Thompson, CEO of 9i Capital Group, added, “People might be taken aback realizing that tips aren’t taxed. If I start reporting tips I’ve never claimed before, could I face an audit? And the $25,000 claim still faces payroll taxes, which can add up.”
Drew Powers also mentioned, “When we consider who needs help the most, we think of low-income earners. Yet, these individuals typically pay very little in federal income taxes, so the benefits may not reach them. What they do pay are payroll taxes like Social Security and Medicare, which remain unchanged.”
What Happens Next
Powers noted that the tax-free deduction for tips can be “complicated” since it can reduce adjusted gross income (AGI).
“A lower AGI boosts eligibility for various tax credits, including the child tax credit and the earned income tax credit, which are refundable,” Powers explained.
If a taxpayer lowers their AGI through tip deductions, they might unexpectedly lose access to these credits, potentially resulting in a higher tax liability or a smaller refund.
