President Donald Trump’s recently passed “One Big Beautiful Bill” (OBBB) has a shiny new tax break for tip earners, but it comes with an expiration date.
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In fact, there are quite a few stipulations on the tax break that might have qualifying tip earners thinking twice about how they treat the extra cash they’re able to pocket. Regardless of how much money it nets back into tip earners’ wallets, the break is temporary.
Here’s why tip earners who get a break should budget like they aren’t.
What Is the Tip Tax Break and Who Gets It?
The good news for qualifying tip earners is that effective 2025, some employees and self-employed people are allowed to deduct “qualified tips” — though with the following caveats:
- The qualifying tips must be “in occupations that are listed by the IRS as customarily and regularly receiving tips” which will be published by Oct. 2, 2025. Meanwhile, some general guidance on how to report tips is available in an IRS publication.
- Qualified tips comprise any “voluntary cash or charged tips” delivered by a customer or through tip sharing at a job.
- There is a maximum annual deduction of $25,000 for employed workers. For self-employed workers, the deduction cannot be higher than the individual’s net income.
- The deduction is only for taxpayers with a modified adjusted gross income (AGI) that is under $150,000 ($300,000 for joint filers).
- This is only the federal portion of taxes. State taxes may still apply.
Learn More: 5 Ways Trump’s ‘Big, Beautiful Bill’ Could Impact Your Wallet
How Much Can You Save?
How much can a tip earner really save? Let’s take a hypothetical scenario*:
- You make $12/hour base pay.
- You earn $250/week in tips on top of your base pay.
- You work 50 weeks/year = $12,500/year in tips.
If the full $12,500 counts as deductible under the new rules:
For someone in the 22% federal tax bracket:
- Deduction value = $12,500
- 22% = $2,750 in tax savings
For someone in the 12% bracket:
- Deduction value = $12,500
- 12% = $1,500 in tax savings
*(Note that these numbers don’t reflect state taxes).
A Raw Deal for Tipped Workers Who Earn Below Minimum Wage
This tipped tax break benefit goes down significantly, however, for workers in states where they earn a sub-minimum base wage (such as $2.13/hour federally) and rely on tips to bring their total pay up to minimum wage and sometimes beyond. In these cases, only the portion of tips that exceeds the regular minimum wage would be eligible for the deduction.
In a hypothetical scenario of a restaurant worker earning that $2.13/hour minimum wage, in a state where their employer can use their tips to equal minimum wage, this tax break might look as follows:
- Their base wage is $2.13/hour.
- They work 40 hours/week, so base = $85.20/week.
- Minimum wage in your state is $15/hour = $600/week.
- Their tips = $550/week.
Breakdown:
- The first $514.80 of tips are used just to meet minimum wage ($600-$85.20)
- Only the remaining $35.20/week counts as “above regular pay.”
- $35.20/week
- 50 weeks = $1,760/year deductible
If you’re in the 12% tax bracket, that’s just $211 in annual tax savings.
Why This Tax Break Won’t Last
While this break may bring some relief to some tipped taxpayers, it’s temporary — the provision is only good through 2028 unless further legislation extends it. And temporary relief can create a permanent budgeting problem if you’re not careful, through things like lifestyle creep and overspending.
Don’t Spend It — Redirect It
If you’re in the group that will see some additional income, rather than increasing your spending, try to treat tip income as if it’s still taxed by preserving your existing budget. Instead, you can do one of the following things with that extra money:
- Build an emergency fund. This is a great opportunity to build a padding for emergencies and unexpected expenses or even job loss.
- Pay down debt. If high-interest debt is holding you back, now you can begin to get out from under it.
- Contribute to a retirement account. Get ahead on retirement savings with your extras. Your money will also compound, growing more than just a regular savings.
Think Ahead: What Happens in 2029?
Most importantly, remember that without legislative action, this tax break will end in 2028 and you’ll no longer see that additional income. Taking action now with the additional money will help you prepare for the future. Ideally, speak with a finance or tax planner to plot a smart budgeting strategy.
What To Ask Your Financial Advisor or Tax Preparer
If you’re unsure about whether you qualify for the tax break, reach out to a tax planner and ask the following questions:
- Do I qualify for this tax break?
- Should I adjust my withholdings or estimated taxes?
- How should I save or invest the extra money I’m not paying in taxes?
- Will this affect my eligibility for other benefits or credits?
While it’s fine to enjoy the relief, remember that it’s temporary. The best approach is to stay proactive and prepared.
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This article originally appeared on GOBankingRates.com: Trump’s New Tip Tax Break Is Temporary — Don’t Budget for It
