The 2025 Trump tax legislation — One Huge Lovely Invoice Act (OBBBA) — accommodates a provision for “No tax on ideas.” It says when you earn ideas, you gained’t pay tax on these ideas.
As you’ll be able to anticipate, not everyone seems to be eligible, and never all ideas could have no tax. “No tax” covers just one kind of tax, not all taxes. What’s the catch? Let’s take a deep dive.
Occupation
To start with, you have to be in “an occupation which typically and often obtained tips about or earlier than December 31, 2024.” Don’t assume you’ll be able to run to your boss or your shoppers and have part of your pay labeled as ideas when you’re not in these occupations.
Sure traces of enterprise are robotically excluded. These embrace well being, legislation, accounting, actuarial science, performing arts, consulting, athletics, monetary companies, and brokerage companies. You don’t qualify whether or not you’re employed as an proprietor or an worker and obtain ideas in these companies.
“Performing arts” stands out on this listing. Does that imply a band or a singer gained’t qualify in the event that they obtain ideas?
Voluntary Ideas Solely
A tip qualifies provided that it “is paid voluntarily with none consequence within the occasion of nonpayment, shouldn’t be the topic of negotiation, and is decided by the payor.” I suppose because of this a compulsory 20% service price for a gaggle of six or extra gained’t rely.
The guidelines will be both money or card prices. Shared ideas rely too.
Correctly Reported
In the event you’re in the proper occupation, it doesn’t matter whether or not you’re a W-2 worker otherwise you’re paid by a 1099. The guidelines have to be reported to you and the IRS on the W-2 or 1099. Or you’ll be able to file Kind 4137 together with your tax return to report ideas along with the quantity on these W-2 or 1099 varieties.
At the moment, the W-2 type solely has a field for allotted ideas. Unallocated ideas are blended with common pay in different bins on the W-2. 1099-NEC and 1099-Okay varieties don’t have a separate subject for ideas proper now. The IRS should amend these varieties with extra bins to interrupt out ideas. Till then, your employer or payor can report the tricks to you individually outdoors the W-2 or 1099.
Momentary Window
“No tax on ideas” is just efficient between 2025 and 2028 (inclusive). It expires on the finish of 2028.
Tax Withholding
This provision solely impacts your federal revenue tax. It doesn’t change the Social Safety and Medicare taxes withheld out of your paychecks, or the self-employment tax you could pay along with the common revenue tax. It doesn’t scale back your state taxes.
The IRS will make modifications to payroll tax withholding to deal with ideas in a different way, however the modifications gained’t begin till 2026. You gained’t see any change in your paychecks in 2025 until you alter your tax withholding together with your employer.
Tax Deduction
You should have a brand new tax deduction to your revenue from ideas. You’ll use it to reconcile with modifications to your tax withholding. You’ll get a better tax refund if the tax withholding was too excessive.
This deduction doesn’t decrease your AGI. It doesn’t make it simpler so that you can qualify for different tax advantages, such because the Youngster Tax Credit score.
Greenback Cap
Chances are you’ll not be capable to deduct all of your ideas. There’s a $25,000 cap. This cover is similar whether or not your tax submitting standing is single, head of family, or married submitting collectively.
I suppose Congress thinks {that a} married couple has at most one particular person incomes ideas. Due to this fact, the greenback cap is similar for a single particular person and a married couple. In the event you’re married, and each of you earn ideas, the greenback cap to your mixed ideas is similar as that for a single particular person.
Submitting separate returns doesn’t assist, since you aren’t allowed this tax deduction when you’re married submitting individually.
In the event you earn ideas in a self-employed enterprise (as an example, a sole proprietor hairdresser) and also you deduct enterprise bills, the greenback cap can also be restricted by the web revenue in any case enterprise bills. In the event you obtained $20,000 in ideas however the enterprise solely made $15,000 in web revenue, you’ll be able to solely deduct $15,000.
Revenue Phaseout
The $25,000 cap goes down slowly as your revenue will increase above $150,000 ($300,000 for married submitting collectively). It decreases by $100 for each $1,000 of revenue above the edge. The cap drops to zero when your revenue will get to $400,000 ($550,000 for married submitting collectively).
Most individuals receiving ideas don’t have an revenue that top and gained’t be affected by the revenue phaseout.
Calculator
I made a calculator that will help you estimate your federal revenue tax earlier than and after “no tax on ideas.” Use the calculator to see how a lot you’ll profit. (E mail readers: The calculator doesn’t work in emails. Please go to the web site to attempt the calculator.)
In the event you’re married submitting collectively, please embrace revenue and ideas from each of you.
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You’ll discover extra deep dives on current modifications from the 2025 Trump tax legislation within the full OBBBA collection.
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