Senate lawmakers have approved a bill aimed at eliminating federal income taxes on advanced income.
Why is it important?
This initiative, which aligns with one of President Donald Trump’s major promises during the 2024 election campaign, has also gained support from some Democrats.
What’s the change for tips?
The proposed NO Tax Act introduces a new tax credit of up to $25,000 for certain tips, though there are specific restrictions in place.
Texas Senator Ted Cruz played a significant role in January, teaming up with a bipartisan group of co-sponsors, including Nevada Democrat Senator Jackie Rosen. The Senate Republicans allowed Rosen to advance the bill through a unanimous consent agreement, a procedure that permits senators to push legislation forward without needing majority consent from their colleagues.
Who will it affect?
The new tip deduction will apply exclusively to cash tips that meet two key criteria:
- Tips should be received by employees in occupations where tipping is common.
- Employees must report these tips to their employer for payroll tax withholding. (Currently, only tips exceeding $20 a month need to be reported.)
However, employees whose annual salaries exceed a specific threshold from the previous tax year ($160,000 in 2025, adjusted yearly for inflation) won’t be able to claim this new deduction.
When will it take effect?
Since the bill has only passed the Senate, it hasn’t yet become law. If it does become law, the Treasury Secretary will take 90 days to provide lawmakers with a list of occupations where tips have traditionally been given, effective as of December 31, 2023. The law would apply to all taxable years beginning after December 31, 2024.
What people are saying
Senator Jackie Rosen expressed on the Senate floor: “Our families, especially those in Nevada, are feeling the pressure and need genuine relief. For many in service and hospitality, tips are not just extras.”
Senator Ted Cruz commented, “Whether it’s part of a bigger legislation or standalone, this “tax on tips” will eventually become law, offering real relief to hardworking Americans. I’m proud of what we’ve accomplished in the Senate.”
Senate Minority Leader Chuck Schumer remarked in a statement reported by NBC News: “These working Americans, from servers to delivery drivers, labor for every dollar and deserve tax relief, not added burdens.”
What’s next?
The bill is now set to move forward to the House of Representatives.
