IRS Draft Form Confirms Tip Deduction Marriage Penalty

Shortly after the release of the One Big Beautiful Bill, I noted an apparent marriage penalty in the No Tax on Tips provision.  My friend Grok told me that I was the first commentator to take note of it, but I take compliments from Grok with a grain of salt. You can’t take the “No Tax” in the title literally.  The provision is an income tax deduction subject to a phase-out, which I’m not going to get into here and a limitation, which is where the marriage penalty comes in.

The Limitation

Both the tips deduction and a similar overtime deduction require that married taxpayers file a joint return in order to claim the deduction. And they both have a limitation.  In the case of the overtime deduction it is $12,500 on a single return and $25,000 on a joint return.  For the tip deduction the limit is $25,000.  So it is a better deal for single well-tipped individuals than it is for single individuals who work a lot of overtime. Looking at it negatively, though, there could be a significant marriage penalty for well tipped individuals who tie the knot.  They had a $25,000 deduction limit on each of their single returns or a total of $50,000 and now they share a $25,000 limit.

Nevada Congresspeople Weigh In

I wasn’t the only person to notice this.  Most notably the Democrats in Nevada’s congressional delegation noticed. They joined in writing a letter to the IRS encouraging IRS to interpret the “No Tax on Tips” provision in a taxpayer friendly manner.  The letter, signed by Senators Masto and Rosen and Representatives Titus, Horsford and Lee, addresses issues like auto-gratuities, the Gaming Industry Tip Compliance Agreement, joint returns with ITINs rather than Social Security numbers, specified service trade or business restrictions, which I addressed here, and the marriage penalty.

Here is what the senators and representatives have to say about the marriage penalty.

“Section 70201 provides that “the amount allowed as a deduction under this section for any taxable year shall not exceed $25,000” but does not specify if this amount applies in the case of a joint return. Such an interpretation would create a substantial marriage penalty for couples with two tipped wage earners and we urge IRS and Treasury to allow up to $25,000 per individual, even if filing jointly as mandated by the statute for married couples. A $50,000 cap on joint returns aligns with Congressional intent, as evidence by the phase out language under §224(b)(2)(A), which states that the deduction is reduced “by $100 for each $1,000 by which the taxpayer’s MAGI exceeds $150,000 ($300,000 in the case of a joint return).” It is clear from this language, which provides for a phaseout at double the income level for joint returns, that Congress intended the deduction cap to be doubled in the case of a joint return and for the $25,000 limit to be applied on an individual basis.”

That thing about it being clear that Congress intended that the deduction cap be doubled is a little suspicious.  The language on overtime does double the cap from $12,500 to $25,000 so they clearly know how to have language that doubles a cap.

From The IRS

The IRS has issued a draft form to summarize the new deductions from the One Big Beautiful Bill and it appears that it is leaving the marriage penalty intact. We see Line 7 in Part II No Tax on Tips “Enter the smaller of the amount on line 6 or $25,000”.  By way of contrast we see in Part III No Tax on Overtime Line 15 “Enter the smaller of the amount on line 14c or $12,500 ($25,000 if married filing jointly).  Both parts include a caution that joint filing is required for married taxpayers to claim the deduction.

I thought it likely that IRS would create a new form to summarize the deductions.  Parts IV and V cover No Tax on Car Loan Interest and Enhanced Deduction for Seniors.  Interestingly, the car loan interest deduction does not require joint filing.  A couple with two pricey cars should run the numbers on separate filing this year.

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Originally published on Forbes.com.

For articles oriented toward tax professionals check out Think Outside The Tax Box.

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