THREE TRUMP TAX CUT IDEAS
Are They Sound?
As the 2024 presidential election cycle heats up, the candidates are throwing out a growing list of proposals designed (primarily) to attract voters. Democrats generally rely on the strategy of handing out government benefits and Republicans tend to promise tax cuts. As such, Democrats attempt to buy votes with other people’s money while Republicans attempt to buy votes with the voters’ own money.
Donald Trump has come out with various proposals that fall into the latter category. Three such ideas have garnered much attention, both positive and negative, depending on whether one sports blue or red neckwear. Below is my analysis of the three major ideas that Trump has tossed out (beyond his commitment to extend the Tax Cuts and Jobs Act).
- Eliminate Taxes on Tips
(Check out Dan’s video)
In a campaign stop in Nevada earlier this summer, Trump pledged to eliminate taxes on tip income. At present, tip income paid to service workers is treated just like wage income. It is subject to an income tax on the part of the employee who received the tip, and employers must pay employment taxes on the tips their employees receive. Very shortly after Trump made this “don’t tax tips” announcement, Sen. Ted Cruz (Rep. TX) introduced legislation in the Senate to push the idea through Congress. Cruz’s bill is known as the No Tax on Tips Act. A number of other Republican senators are behind the idea.
Under the bill, employees receiving tips would be allowed a deduction on their tax return in “an amount equal to the cash tips” received during the year. Those who don’t itemize deductions would be allowed a special line-item deduction. The IRS would also be required to amend its withholding tables to take into account the new exclusion. It does not appear from the bill that employers would receive any relief from the employment tax liability imposed on the tip income. Indeed, the employer would still be required to report the tips to the IRS on the employee’s Form W-2, and that is the means by which the amount of the deduction is determined.
There is a long line of court opinions dating back decades holding that tips earned by service providers in connection with their employment as such are taxable income and not gifts or gratuities. The determining factor is that a tip is paid only in connection with services rendered in the course of a commercial transaction, whereas a gift or gratuity is given freely and without any expectation of return, outside of an otherwise commercial transaction.
Trump’s proposal would change long-standing law, which is fine by me. I’m in favor of any tax cut anywhere it might show up. However, from my reading of the bill, the tax break covers only the employee, and not the employer. If tips are not to be taxed, it seems to me that the employer should be relieved of the burden along with the employee.
The IRS has gone to great lengths over the years to ascertain the amount of tips earned by workers, and ensure that those tips are accurately reported. During the 1980s, the IRS even went so far as to plant undercover criminal investigators into businesses that traditionally have high levels of cash transactions and hospitality workers. The IRS’s Las Vegas and Atlantic City casino tip projects are examples.
The problem with the idea is not the tax cut, per se (which I encourage). The problem is the market distortion that the tax cut will likely create. First, the cut is aimed at workers primarily in the hospitality industry where tips are most prevalent. But certainly they aren’t our only service workers. Service workers cut through all elements of the economy, from package delivery services, to home care services of every description, to tech services, and so on endlessly. Are they going to be covered by the tip exclusion? Tips received by such workers are typically not shown on Form W-2. Such workers are responsible to record and report their tips independently from their employers. With no tips shown on the W-2, will they be denied the deduction?
And most significantly, will employers in traditional tip-intensive businesses (bars, clubs, restaurants, etc.) significantly reduce (or stop) paying wages entirely? Will they push to encourage employees to work only for tips? And how will state and federal minimum wage laws bear upon the discussion? Tax-exempt tips constitute an immediate tax-free pay raise equal to the amount of tax the worker would otherwise pay. Will that count against a minimum wage? On the other hand, I can easily image a significant hike in minimum wage laws in an effort offset the employment tax revenue lost by exempting tips from taxation.
Ironically, Vice President Harris came out with her own plan to exempt tips from the income tax. I suppose even a broken clock is right twice a day.
Subscribers of Pilla Talks Taxes get the rest of the article including:
Dan’s analysis of Donald Trump’s Proposal of:
2. Eliminating Taxes on Overtime Pay
3.Eliminating Taxes on Social Security Benefits (See Dan’s Video)
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Articles found in the latest
PILLA TALKS TAXES ISSUES:
September
THREE TRUMP TAX CUT IDEAS
Are They Sound?
(Blog)
Also check out Dan's Videos
Taxes on Tips
Taxes on Social Security
SUPREME COURT DISCUSSES “UNREALIZED GAINS”
Congressional Scheme Upheld Because “We Need the Money” by Scott MacPherson
August
WHAT DOES THE HARRIS TAX PLAN LOOK LIKE?
A Peek Back at her 2020 Campaign
IRS FIRES-UP ERC VOLUNTARY DISCLOSURE PROGRAM
Second Program Not as Sweet as the First
TAX COURT RULES THAT PETITION FILING DEADLINES AREN’T DEADLINES
Yet Another Decision Undermines Statutory Deadlines
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