Exclusion from gross income for certain reported tips

(a)

In general

Part III of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by inserting after section 139J the following new section:

139K.

Exclusion of certain reported tips

(a)

In general

There shall be allowed as a deduction an amount equal to the qualified tips received during the taxable year that are included on statements furnished to the individual pursuant to section 6041(d)(3), 6041A(e)(3), 6050W(f)(2), or 6051(a)(18) of Public Law 119–21, or reported by the taxpayer on Form 4137 (or successor).(b)

Limitation

(1)

In general

The amount allowed as a deduction under this section for any taxable year shall not exceed $35,000.(2)

Limitation based on adjusted gross income

(A)

In general

The amount allowable as a deduction under subsection (a) (after application of paragraph (1)) shall be reduced (but not below zero) by $50 for each $500 by which the taxpayer’s modified adjusted gross income is between $50,000 and $75,000 ($100,000 and $150,000 in the case of a joint return), and no such tax exclusion shall apply to individuals with AGI over $75,000 ($150,000 in the case of a joint return).(B)

Modified adjusted gross income

For purposes of this paragraph, the term modified adjusted gross income means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933 of Public Law 119–21.(c)

Living wage indexing

The Secretary shall review annually the national and regional living wage estimates and may adjust the exclusion or eligibility thresholds accordingly.(1)

Initial treatment

This section shall apply to all taxable years beginning after December 31, 2025, and shall expire to the taxable year beginning on December 31, 2028.(2)

Reporting and evaluation

The Secretary shall submit biennial reports to Congress beginning July 1, 2027, assessing:(A)Utilization of the exclusion by sector and income bracket.(B)Effects on workforce participation and wage equity.(C)Recommendations for enhancement.(d)

Tips received in course of trade or business

In the case of qualified tips received by an individual during any taxable year in the course of a trade or business (other than the trade or business of performing services as an employee) of such individual, such qualified tips shall be taken into account under subsection (a) only to the extent that the gross income for the taxpayer from such trade or business for such taxable year (including such qualified tips) exceeds the sum of the deductions (other than the deduction allowed under this section) allocable to the trade or business in which such qualified tips are received by the individual for such taxable year.(d)

Qualified tips

(1)

In general

The term qualified tips means cash tips received by an individual in an occupation which customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary.(2)

Exclusions

Such term shall not include any amount received by an individual unless—(A)such amount is paid voluntarily without any consequence in the event of nonpayment, is not the subject of negotiation, and is determined by the payor,(B)the trade or business in the course of which the individual receives such amount is not a specified service trade or business (as defined in section 199A(d)(2)), and(C)such other requirements as may be established by the Secretary in regulations or other guidance are satisfied. For purposes of subparagraph (B), in the case of an individual receiving tips in the trade or business of performing services as an employee, such individual shall be treated as receiving tips in the course of a trade or business which is a specified service trade or business if the trade or business of the employer is a specified service trade or business.(3)

Cash tips

The term cash tips includes tips received from customers that are paid in cash or charged and, in the case of an employee, tips received under any tip-sharing arrangement.(e)

Social security number required

(1)

In general

No deduction shall be allowed under this section unless the taxpayer includes on the return of tax for the taxable year such individual’s social security number.(2)

Social security number defined

The term social security number shall have the meaning given such term in section 24(h)(7).(f)

Married individuals

If the taxpayer is a married individual (within the meaning of section 7703), this section shall apply only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year.(g)

Regulations

The Secretary shall prescribe such regulations or other guidance as may be necessary to prevent reclassification of income as qualified tips, including regulations or other guidance to prevent abuse of the deduction allowed by this section.

(b)

Deduction allowed to non-Itemizers

Section 63(b) is amended by striking “and” at the end of paragraph (3), by striking the period at the end of paragraph (4) and inserting “, and”, and by adding at the end the following new paragraph:

(5)the deduction provided in section 224.

(c)

Omission of correct social security number treated as mathematical or clerical error

Section 6213(g)(2), as amended by the preceding provisions of this Act, is amended by striking “and” at the end of subparagraph (W), by striking the period at the end of subparagraph (X) and inserting “, and”, and by inserting after subparagraph (X) the following new subparagraph:

(Y)an omission of a correct social security number required under section 224(e) (relating to deduction for qualified tips).

(d)

Exclusion from qualified business income

Section 199A(c)(4) is amended by striking “and” at the end of subparagraph (B), by striking the period at the end of subparagraph (C) and inserting “, and”, and by adding at the end the following new subparagraph:

(D)any amount with respect to which a deduction is allowable to the taxpayer under section 224(a) for the taxable year.

(e)

Published list of occupations traditionally receiving tips

Not later than 90 days after the date of the enactment of this Act, the Secretary of the Treasury (or the Secretary’s delegate) shall publish a list of occupations which customarily and regularly received tips on or before December 31, 2024, for purposes of section 224(d)(1) of the Internal Revenue Code of 1986 (as added by subsection (a)).(f)

Withholding

The Secretary of the Treasury (or the Secretary’s delegate) shall modify the procedures prescribed under section 3402(a) of the Internal Revenue Code of 1986 for taxable years beginning after December 31, 2025, to take into account the deduction allowed under section 224 of such Code (as added by this Act).(g)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2024, and ending December 31, 2026.(h)

Pilot program

Upon expiration of this section, the Secretary of the Treasury shall commence a pilot program to examine the potential benefits to extending the tipped wage tax exemptions as outlined in this section permanently and without expiration.(i)

Transition rule

In the case of any cash tips required to be reported for periods before January 1, 2026, persons required to file returns or statements under section 6041(a), 6041(d)(3), 6041A(a), 6041A(e)(3), 6050W(a), or 6050W(f)(2) of the Internal Revenue Code of 1986 (as amended by this section) may approximate a separate accounting of amounts designated as cash tips by any reasonable method specified by the Secretary.