Dec 3, 2025
President Donald Trump delivered on his promise to exempt tips from taxes but critics say the “Big Beautiful” policy may deliver a smaller advantage than expected — and could hurt the very workers it’s supposed to help.
“I would be hard-pressed to think of a stupider tax policy that’s become law,” Brian Galle, a professor at UC Berkeley who specializes in tax law, told online news publication The Almanac (1).
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Like many of Trump’s populist moves, the headline tax break sounds good for working people.
But when filers dig into the details, they may find the IRS’s generosity isn’t so generous after all.
Here’s a look at the finer print behind the promise.
The not-so-fine print behind Trump's no-tax-on-tips policy
Trump made the policy sound pretty all-encompassing when he trumpeted the plan.
“If you're a restaurant worker, a server, a valet, a bellhop, a bartender or one of my caddies ... or any other worker who relies on tipped income, your tips will be 100% yours,” he said in January (2).
Not exactly. As the blog Tax Act reveals, the maximum deduction through this policy is $25,000 per year per tax return.
Even if there were 0% taxes on your tips at the federal level (and it’s not that simple), you still have to report and pay state and local taxes on your tips.
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Moreover your tips are not “100% yours” until your payroll taxes (think Social Security and Medicare) are deducted, which represent 7.65% of your total (3).
Plus, not all tips are created equal. Only tips that are “voluntarily paid” by customers — as opposed to automatic service charges or gratuities — qualify for deduction.
That means if you’re a restaurant server and there’s an automatic gratuity on large groups, you can’t deduct that gratuity.
People who make a lot of money from tips (more than $150,000 a year or $300,000 for those who file jointly with a spouse) won’t be eligible.
So workers like bartenders, adult entertainers and people who have a salaried job and a tipped side hustle may be out of luck.
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How the new policy could hurt tipped workers
UC Berkeley’s Brian Galle says the tips policy makes taxes much more complicated and could actually hurt low-income service-industry workers.
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He suggested that employers might exploit the tax policy as an excuse to cut their employees’ pay by the equivalent of what they’re saving in taxes.
Customers experiencing tipping fatigue — the growing pushback against automatic tipping at point-of-sale machines — may further reduce their tips if they feel workers are getting their tips tax-free.
But the bigger problems are in the law’s marriage penalty and deduction limits. For individuals and couples filing jointly, the maximum deduction is $12,000, so a family with two people working in the service industry would have to get divorced and file as individuals to get the full $24,000 tax break.
According to the Economic Policy Institute, exempting tips from taxation could actually cause some low-income workers to lose money overall, because their lower reported income might make them ineligible for valuable tax credits like the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) (4).
The deduction is temporary and scheduled to expire after tax year 2028 unless extended by legislation, so policy makers will have two years to see what the consequences of no-tax-on-tips is before deciding whether the plan helps more than it hurts.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
The Almanac (1); USA Today (2); Tax Act (3); IRS (4)
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Will Kenton is a personal finance writer with a Master's degree in Economics who has been published in Investopedia, AP News, TIME Stamped and Business Insider among other publications.
