Trump’s 2025 Tax Plan- No Federal Income Tax On Tips & Overtime For Workers Earning Under $160K
President Donald J. Trump’s latest legislative proposal, the “One Big Beautiful Bill Act,” introduces significant tax reforms aimed at providing relief to middle-income earners.
A notable feature of this bill is the elimination of federal income tax on tips and overtime pay for workers earning less than $160,000 annually.
This article delves into the specifics of this provision and its implications for eligible workers.
Key Provisions of the Tax Plan
1. Elimination of Federal Income Tax on Tips and Overtime
- Eligibility: Workers earning under $160,000 per year.
- Scope: Applies to reported tip income and overtime pay.
- Duration: Effective from 2025 through 2028.
- Tax Treatment: These earnings will be excluded from federal taxable income calculations.
2. Additional Tax Reforms
- SALT Deduction Cap Increase: Raises the State and Local Tax (SALT) deduction cap from $10,000 to $30,000 for joint filers with an Adjusted Gross Income (AGI) under $500,000.
- Bonus Depreciation: Restores 100% bonus depreciation for qualifying property acquired after January 19, 2025, and placed in service before January 1, 2030.
- Qualified Business Income (QBI) Deduction: Increases the deduction from 20% to 23% for pass-through business income, benefiting small business owners and self-employed individuals.
Detailed Overview
No Tax on Tips and Overtime
The proposed tax plan aims to provide financial relief to workers in industries where tips and overtime constitute a significant portion of income, such as hospitality, food service, and retail.
By excluding these earnings from federal income tax, eligible workers could see an increase in their take-home pay.
Example:
A restaurant server earning $35,000 in base salary and $10,000 in tips would, under the new plan, only have the $35,000 considered for federal income tax purposes, potentially resulting in substantial tax savings.
SALT Deduction Cap Increase
The bill proposes raising the SALT deduction cap to $30,000 for joint filers with AGI under $500,000. This change is particularly beneficial for taxpayers in high-tax states, allowing for greater deductions of state and local taxes on federal returns.
Restoration of 100% Bonus Depreciation
Businesses can fully deduct the cost of qualifying property in the year it is placed in service, encouraging investment in equipment and infrastructure.
This provision is set to apply to property acquired after January 19, 2025, and placed in service before January 1, 2030.
Increase in QBI Deduction
The Qualified Business Income deduction increases from 20% to 23%, providing additional tax relief to owners of pass-through entities, such as sole proprietorships, partnerships, and S corporations.
This change aims to stimulate small business growth and entrepreneurship.
Key Provisions
| Provision | Details |
|---|---|
| No Tax on Tips & Overtime | Excludes tips and overtime pay from federal income tax for workers earning < $160K/year. |
| SALT Deduction Cap Increase | Raises cap to $30,000 for joint filers with AGI under $500,000. |
| 100% Bonus Depreciation | Allows full deduction of qualifying property costs in the year placed in service (2025-2030). |
| QBI Deduction Increase | Increases deduction from 20% to 23% for pass-through business income. |
President Trump’s 2025 tax proposal introduces significant changes aimed at providing tax relief to middle-income earners and stimulating business investment.
By eliminating federal income tax on tips and overtime for eligible workers and enhancing deductions for businesses, the plan seeks to boost disposable income and economic growth.
FAQs
Who qualifies for the tax exemption on tips and overtime?
Employees earning less than $160,000 annually, who receive income from tips and/or overtime pay, are eligible for this exemption.
How does the SALT deduction cap increase affect taxpayers?
Taxpayers in high-tax states can deduct up to $30,000 in state and local taxes, reducing their federal taxable income, provided their AGI is under $500,000.
What is the benefit of the increased QBI deduction?
Small business owners and self-employed individuals can deduct 23% of their qualified business income, lowering their taxable income and potentially reducing their tax liability.
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