The Working for Tips Tax Relief Act of 2025
- Sponsor
- Rep. Davis, Donald G. [D-NC-1]
- Committees
- Ways and Means Committee (primary)
- Last action
- Nov 25, 2025
Bottom line
The bill aims to increase the take-home pay for eligible tipped workers by making a significant portion of their reported tips tax-exempt, with a focus on lower and middle-income earners.
What it actually does
This bill, "The Working for Tips Tax Relief Act of 2025," creates a new temporary tax deduction for certain reported tips, effectively excluding them from gross income. It caps the deduction at $35,000 per year and includes income-based phase-outs, targeting low- and moderate-income service workers. The bill also mandates reporting and a pilot program to evaluate the deduction's effects before considering permanent extension.
Proponents argue
Supporters argue that this bill provides much-needed tax relief to low- and moderate-income service workers who rely heavily on tips, acknowledging the unique and often variable nature of their earnings. They contend it will boost disposable income for these essential workers, stimulate local economies, and help these individuals better manage their finances in a challenging economic environment.
Opponents contend
Critics might contend that this bill introduces a new complexity to the tax code and could lead to significant federal revenue loss. They may also argue that it creates an uneven playing field between tipped and non-tipped workers, potentially incentivizing the reclassification of wages as tips or disproportionately benefiting certain sectors over others, while also raising questions about tax equity.
The bill is concise and straightforward, allowing an informed reader to understand its core provisions quickly.
Section 2(a), inserting new Section 139K into the Internal Revenue Code
New Deduction for Qualified Tips
This provision establishes a new deduction for "qualified tips" received by individuals, effectively excluding them from gross income for tax purposes. The deduction applies to tips that are properly reported through various mechanisms, such as employer statements or the taxpayer's own reporting on Form 4137, aiming to reduce the tax burden on service workers.
Supporters argue
Supporters argue this directly benefits service workers, many of whom are low-to-moderate income, by increasing their disposable income and recognizing the variable nature of their earnings. This relief can help them cope with rising living costs.
Critics contend
Critics might contend that this creates an uneven playing field between tipped and non-tipped workers, could incentivize underreporting of tips to stay within income thresholds, or lead to significant federal revenue loss.
Tradeoffs
This provision balances the goal of supporting service workers with concerns about tax equity and potential impacts on federal revenue.
Section 2(b), amending new Section 139K(b)
Income and Amount Limitations for Tip Deduction
This section caps the maximum deduction at $35,000 per year. It also introduces an income-based phase-out: the deduction is gradually reduced for individuals with modified Adjusted Gross Income (AGI) between $50,000 and $75,000 (or $100,000 and $150,000 for joint filers), and completely eliminated for those above $75,000 ($150,000 joint).
Section 2(d), amending new Section 139K(d)
Defining "Qualified Tips" and Preventing Abuse
This provision defines "qualified tips" as cash tips (including charged tips and tips from sharing arrangements) received in occupations that customarily and regularly received tips on or before December 31, 2024. It explicitly excludes amounts that are not voluntary, are negotiated, or are from "specified service trades or businesses" (e.g., health, law, accounting, financial services), aiming to prevent the deduction from being applied to non-traditional tip income or professional services.
Section 2(c)(1), (2), (g), (h)
Temporary Nature, Reporting, and Pilot Program
The deduction is initially set to apply to taxable years beginning after December 31, 2025, and will expire on December 31, 2028. The Secretary of the Treasury is required to submit biennial reports to Congress, starting July 1, 2027, assessing the utilization of the exclusion, its effects on workforce participation and wage equity, and recommendations for enhancement. Upon expiration, a pilot program will commence to examine the potential benefits of extending the tipped wage tax exemptions permanently.
This amendment allows the new tip deduction to be taken by non-itemizers, effectively making it an 'above-the-line' deduction or part of the standard deduction calculation.
Section 2(b) amending Section 63(b)
Why it matters:This is standard legislative practice for technical tax code amendments that ensure a new deduction is accessible to its intended beneficiaries, rather than being a deliberate attempt to obscure the provision.
Case for: Ensures the deduction is accessible to the vast majority of low- and moderate-income workers who typically take the standard deduction, maximizing the bill's intended impact and reaching its target demographic.
Case against: No specific opposition is typically raised against this provision, as it is an enabling mechanism for the main deduction and aligns with the bill's stated goals.
Estimated impact: Significantly broadens the reach of the deduction to its intended beneficiaries, ensuring that most tipped workers can benefit regardless of whether they itemize.
This amendment prevents any amount for which a deduction is taken under the new tip exclusion from also being considered "qualified business income" for the purposes of the Section 199A deduction.
Section 2(d) amending Section 199A(c)(4)
Why it matters:This is standard legislative practice to prevent unintended interactions between different tax provisions and to avoid taxpayers receiving a double tax benefit on the same income, rather than an attempt to hide a controversial measure.
Case for: Prevents taxpayers from receiving a double tax benefit on the same income, ensuring fairness and preventing unintended revenue loss that could arise from claiming both the tip deduction and the qualified business income deduction.
Case against: No specific opposition is typically raised against this technical correction, as it is designed to maintain the integrity and consistency of the tax code.
Estimated impact: Prevents potential tax avoidance or excessive benefits for self-employed individuals who might otherwise attempt to claim both deductions on the same income.