Tip Tax Termination Act

Bill Number

H.R. 558

Origin Chamber

House

Congress

119th Congress, Session 1

Policy Area

Taxation

Status

Introduced

Latest Action

2025-01-20: Referred to the House Committee on Ways and Means.

Last Updated

2025-04-02T13:53:39Z

AI-Generated Summary

Purpose

The "Tip Tax Termination Act" (H.R. 558) aims to provide temporary tax relief to workers in tip-reliant jobs by excluding a portion of their tips from federal income taxes. This is intended to increase take-home pay for these employees over a five-year period, recognizing tips as a key part of their compensation in industries like food service and hospitality.

Key Provisions

• Exclusion from Gross Income: Up to $20,000 of "eligible tips" received per taxable year are not counted as gross income (the total income subject to taxes) for federal income tax purposes.
• Definition of Eligible Tips: These include tips earned while performing services in jobs that commonly rely on tips as part of wages, such as cosmetology (e.g., hair styling), hospitality (e.g., hotel services), and food service (e.g., restaurants and bars).
• Denial of Double Benefit: Excluded tips cannot be used to calculate most tax deductions or credits (to prevent extra tax breaks), but they are included when determining eligibility for the Child Tax Credit (a credit to help families with children) and the Earned Income Tax Credit (a credit for low- to moderate-income workers).
• Termination Date: The exclusion ends for tips received after December 31, 2029.
• Withholding Adjustments: The U.S. Department of the Treasury must update tax withholding tables and procedures (used by employers to deduct taxes from paychecks) to account for the excluded tips.
• Effective Date: Applies to tips received after December 31, 2024.

Significant Changes to Existing Law

Under current U.S. tax law (the Internal Revenue Code of 1986), all tips are treated as taxable income, just like regular wages, and must be reported and taxed. This bill introduces a new section (139J) that creates a temporary exclusion for up to $20,000 of tips in specified industries, marking a shift toward treating certain tips more like non-taxable reimbursements. It also requires procedural updates to withholding rules, which previously did not account for such exclusions.

Potential Impacts

• On Citizens: Tipped workers in eligible industries could see an increase in their after-tax income, potentially improving financial stability for low-wage earners in service roles. However, the benefit is capped at $20,000 annually, so higher tip earners would still pay taxes on amounts above that.
• On Government Agencies: The Internal Revenue Service (IRS) and Treasury Department will need to implement new rules for reporting, withholding, and enforcement, which could require updates to forms, software, and guidance. This may lead to reduced federal tax revenue over the five-year period, potentially affecting budget allocations.
• On International Relations: No direct impacts, as the bill focuses solely on domestic U.S. tax policy.

Main Stakeholders Affected

• Tipped Workers: Primary beneficiaries, including servers, bartenders, hotel staff, hairdressers, and others in tip-dependent jobs, who may retain more of their earnings.
• Employers in Service Industries: Restaurants, hotels, salons, and similar businesses could see indirect benefits through higher employee morale and retention, though they must adjust payroll withholding.
• U.S. Government and Taxpayers: The IRS and Treasury handle implementation; broader taxpayers may face reduced government revenue, potentially shifting the tax burden elsewhere.
• Low-Income Families: Those qualifying for the Child Tax Credit or Earned Income Tax Credit could see enhanced benefits when calculating these credits.

Notable Legal, Constitutional, or Political Implications

• Legal Implications: The bill amends the tax code without altering broader reporting requirements for tips (e.g., under existing laws like the Fair Labor Standards Act), but it could lead to increased IRS audits to verify "eligible tips" and prevent abuse. The cap and definitions aim to limit the exclusion to genuine tip income, reducing risks of legal challenges over unequal treatment.
• Constitutional Implications: No apparent issues with the U.S. Constitution, as Congress has broad authority under Article I to regulate taxes. It does not infringe on free speech, equal protection, or other rights.
• Political Implications: As a targeted tax cut for service workers, it may appeal to constituents in hospitality-heavy regions but could spark debates on tax fairness (e.g., why only certain industries?). Introduced by Rep. Bacon (R-NE) and referred to the House Ways and Means Committee, it reflects ongoing discussions on worker relief post-pandemic, though its five-year sunset clause allows for future congressional review without permanent changes.

This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.

Sponsor

Rep. Bacon, Don [R-NE-2]

Recent Actions

• 2025-01-20: Referred to the House Committee on Ways and Means.
• 2025-01-20: Introduced in House
• 2025-01-20: Introduced in House

Bill Versions

• Tip Tax Termination Act — issued 2025-01-20 — PDF (3 pages)