Former President Donald Trump has signed a major tax measure into law that reshapes parts of the federal tax code and introduces a significant change for service workers: tips are now exempt from federal income tax. Supporters call the law meaningful relief for working Americans, while critics warn it could add substantially to the federal deficit over the next decade.
The legislation permanently extends existing tax cuts and adds new provisions, including tax-free overtime pay and expanded deductions for seniors. Its most notable feature removes federal income tax on tips, affecting millions of workers in hospitality and service industries such as restaurants, bars, hotels, and delivery services. While tips must still be reported, they are no longer federally taxed. Automatic service charges and income from professional trades are excluded from the exemption
Supporters argue the change benefits workers with unstable earnings and limited benefits. Senator Ted Cruz, joined by Senator Jacky Rosen, said the policy allows workers to keep more of what they earn. Advocates also note that small businesses may benefit by increasing take-home pay without raising wages.
Critics caution that the exemption favors certain workers and may encourage shifts in compensation practices. They also argue that, combined with permanent tax cuts, the law prioritizes short-term gains over long-term fiscal stability. Despite ongoing debate, many service workers are already seeing higher take-home pay. Economists continue to study whether the policy will support sustained growth or deepen budget concerns.