On July 4, President Donald Trump signed the “One Big Beautiful Bill Act” into law.

The bill includes several tax-related initiatives, one of which is the elimination of tax on tips.

The legislation allows eligible employees to deduct up to $25,000 in reported tip income from their federal taxable income annually, starting with the 2025 tax year.

Not sure how this tax law works? Here’s what to know.

What is the ‘Big Beautiful Bill?’

The One Big Beautiful Bill Act, often referred to as the “Big Beautiful Bill,” is a piece of legislation that consolidates a wide range of Republican policy priorities into a single package.

Here is what it includes:

  • No tax on tips and overtime: The bill proposes exempting tips and overtime wages from federal income taxation, delivering on two key pledges from Trump’s campaign. It would also let taxpayers deduct up to $10,000 in interest on auto loans for vehicles manufactured in the U.S. Additionally, the legislation includes a temporary $6,000 tax credit for seniors, which gradually decreases as their income rises.

  • Increased defense and border security spending: Including billions for military upgrades and thousands of new ICE and Border Patrol agents.

  • Cuts to Medicaid and SNAP: The Bill would make cuts to Medicaid and SNAP through stricter eligibility requirements and spending reductions. Republicans proposed changes to the Medicaid program, currently covering 72 million Americans, by introducing a requirement for able-bodied adults under 65 to work at least 80 hours per month. Certain groups, such as parents with children under the age of 14, would be exempt from this mandate.

  • Space funding: The bill allocates a wide array of funding for space initiatives, such as $10 billion directed toward Mars exploration efforts, $325 million to support the de-orbiting of the International Space Station, and $85 million to relocate a space shuttle from the National Air and Space Museum near Washington, D.C., to a new home in Texas.

You can see the full bill here.

When will no tax on tips take effect in Texas?

Beginning with the 2025 tax year (for returns filed in early 2026), eligible workers can deduct up to $25,000 in reported tip income from their federal taxable income.

The deduction does gradually phase out for individuals earning more than $150,000 ($300,000 for joint filers) and is set to expire after the 2028 tax year.

How does no tax on tips work?

Under the bill, workers in eligible tip-based jobs would no longer be required to pay federal income tax on their tips. The bill exclusively applies to cash tips. Yet, for IRS tax purposes, tips received in cash, via credit cards, or through electronic payment platforms are generally treated the same.

According to Kiplinger, the bill highlights jobs where tipping is customary, such as food servers, bartenders, hair stylists, nail technicians and ride-share drivers. The U.S. Treasury Department and the IRS will have more say on which jobs are eligible for tax-free tips and overtime.

The new legislation broadens a tax credit for eligible businesses, allowing them to claim credits for payroll taxes paid on employee tips, similar to the benefit currently available to restaurants.

Is there anything no tax on tips doesn’t cover?

While non-cash tips remain taxable under IRS rules, they fall outside the scope of this legislation.

Here’s what the ‘no tax on tips’ provision does not include:

  • You will still pay Social Security and Medicare taxes on your tips, even if you claim the income tax deduction.

  • Cooks, dishwashers, and other back-of-house employees who don’t earn tips also aren’t eligible for no tax on tips.

Are tips supposed to be taxed?

According to the Internal Revenue Service, any tips of $20 or more that an employee receives in a month from one job are considered wages and are subject to withholding.

Cash tips received by an employee during any calendar month are also subject to Social Security and Medicare taxes and must be reported to the employer. However, if the total cash tips received from a single employer in a single calendar month are less than $20, they do not need to be reported, and no taxes need to be withheld.

Here is what the tax code considers taxable tips:

  • Cash tips received directly from customers.

  • Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card or any other electronic payment method.

  • The value of any noncash tips, such as tickets or other items of value.

  • Tip amounts received from other employees distributed through tip pools, tip splitting, or other formal or informal tip-sharing arrangements.

-USA TODAY Network J. Staas Haught and Zac Anderson contributed to this report.

This article originally appeared on Austin American-Statesman: ‘Big Beautiful Bill’: When does no tax on tips start in Texas?

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