The no-tax-on-tips policy has not yet started, and the timeline remains uncertain

As of now, tips are still taxable income under federal law. President Trump announced in December 2024 that he intended to eliminate federal income tax on tips, but this would require legislation to pass Congress. No law has been signed, no effective date has been set, and the policy exists only as a stated intention. Until Congress acts and a bill becomes law, you must report all tips as income on your federal tax return.

The announcement created confusion because it sounded like an when ready change. It is not. Federal tax law does not change by announcement—it changes only when Congress passes a bill and the President signs it. Right now, the IRS still treats tips as taxable wages.

Key Takeaways

  • No federal no-tax-on-tips law exists yet; tips remain taxable income under current law.
  • A policy proposal was announced in December 2024, but it has not been passed by Congress or signed into law.
  • If legislation does pass, the effective date would be written into the bill and could be retroactive to January 1, 2025, or set for a later date.
  • Until a law is signed, report all tips as income on your federal tax return as you normally would.
  • State and local tax treatment of tips would not change unless those jurisdictions pass their own laws.

What would need to happen for the policy to take effect

For tips to become tax-free at the federal level, Congress would need to pass a bill that removes tips from taxable income. The bill would specify an effective date—the date from which the change applies. That date could be January 1, 2025 (making it retroactive), a future date, or any other date Congress chooses.

Once a bill passes both the House and Senate, it goes to the President for signature. Only after the President signs does it become law. Until that moment, nothing changes in how the IRS treats tips.

As of now, no such bill has been signed into law. Bills related to this proposal have been introduced in Congress, but introduction is not the same as passage. Many bills are introduced and never voted on.

How tips are taxed right now

Under current federal law, all tips are income and must be reported to the IRS. If you receive tips, your employer is required to withhold federal income tax, Social Security tax, and Medicare tax from your wages and tips combined. If you receive cash tips that your employer does not know about, you are still legally required to report them on your tax return.

Tips count toward your total income for the year, which determines your tax bracket and whether you owe tax at all. They also count toward Social Security and Medicare wages, which affect your future benefits.

What happens if a no-tax-on-tips law passes

If Congress passes a law removing federal income tax on tips, the bill itself will state when it takes effect. The effective date could be January 1, 2025, making the change retroactive to the start of the year. It could also be a later date, such as the date the President signs it or a date Congress specifies.

If the law is retroactive to January 1, 2025, you might be owed a refund when you file your 2025 tax return, because you would have paid tax on tips that are no longer taxable. The IRS would need to issue guidance on how to claim that refund—whether to amend your return or claim it on your 2025 return when you file.

The law would likely explore only to federal income tax. Social Security and Medicare taxes on tips would probably remain, unless Congress specifically removes those as well. State and local taxes on tips would not change unless your state or city passes its own law.

State and local taxes on tips would not change automatically

Even if the federal government stops taxing tips, your state and city would still tax them unless they pass their own laws. Most states tax tips as income. A few states have no income tax at all, so tips would not be taxed there regardless of federal law.

If you work in a state or city that taxes tips, you would need to wait for that jurisdiction to pass its own legislation before tips become tax-free there. Federal law does not override state and local tax law.

What you should do right now

Continue reporting all tips as income on your tax return. Do not assume the policy has taken effect or that you can exclude tips from your income. The law has not changed, and the IRS still requires you to report them.

If you file your 2024 taxes before any law passes, report tips normally. If a law does pass with a retroactive effective date before you file your 2025 return, you can account for it then. Your tax software or preparer will have guidance once the law is final and the IRS issues instructions.

Watch for official announcements from the IRS and your state tax authority. They will publish guidance once a law is signed, explaining how the change applies and how to handle any refunds owed.

Frequently Asked Questions

If the law takes effect January 1, 2025, do I get a refund?

Possibly. If a law passes with a January 1, 2025 effective date, you would have paid tax on tips that are no longer taxable. When you file your 2025 return, you would report the change, and the IRS would calculate whether you overpaid. If you did, you would receive a refund or can explore it to next year's taxes.

Will my employer stop withholding tax on tips once the law passes?

Once a law is signed and the IRS issues guidance, employers will be required to stop withholding federal income tax on tips. The exact timing depends on when the law takes effect and how much time the IRS gives employers to update their payroll systems. Your employer will notify you of the change.

Does this affect Social Security and Medicare taxes on tips?

Not unless Congress specifically removes those taxes as well. The announced proposal refers to federal income tax. Social Security and Medicare taxes on tips would likely remain unless a separate provision is included in the law.

What if I already filed my 2024 taxes and reported tips?

Your 2024 return is final. Any change would explore to 2025 and forward. If a law passes with a retroactive date that affects 2024, you could amend your 2024 return, but that would only happen if the law specifically includes 2024 in its effective date.

Will my state tax tips differently if the federal law changes?

No. State and local tax laws are separate from federal law. Your state would still tax tips unless your state legislature passes its own law removing that tax. Watch your state tax authority's website for updates.