What’s all the fuss about tips and taxes?

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By Anna Helhoski | NerdWallet

When electioneering, the best pledges are catchy enough to get stuck in a voter’s head. During this election, “no tax on tips” seems to be the phrase fitting that bill.

Both presidential candidates are embracing the promise to exempt workers from paying taxes on their tips. But the problem with no-tax-on-tips proposals, experts say, is that they’re clearly a bid for votes rather than a substantive solution to address the fundamental needs of tipped workers.

“This wouldn’t help very many workers, and it could actually be very harmful to millions more, with the real benefits of this policy change going to employers and the wealthy at the expense of working people,” says David Cooper, researcher from EPI Action, a nonpartisan research and advocacy organization.

How a no-tax-on-tips promise entered the election

On June 9, former President Donald Trump made a promise to end taxes on tips in front of service workers in Las Vegas. Last weekend, in Las Vegas, Vice President Kamala Harris made a similar pledge. It’s no coincidence that both candidates made the announcement in Las Vegas — leisure and hospitality is the dominant industry in the metro area, Bureau of Labor Statistics data shows.

On Monday, White House press secretary Karine Jean-Pierre said that President Joe Biden also supports eliminating taxes on tips for service and hospital workers, as well as raising the minimum wage.

The policy is undeniably appealing for tipped workers and the unions that represent them. After all, who doesn’t want a tax break when they can get it? Experts say the message to voters may be effective, but the policy is less likely to be.

“I’d say, thumbs down to the policy proposal; it’s bad tax policy,” says Kyle Pomerleau, a senior fellow studying federal tax policy and reform at American Enterprise Institute, a right-leaning think tank.

How do tips factor into wages?

Tipped workers are some of the most visible workers: They’re taking your coffee order, cutting your hair, serving your meals in restaurants, delivering your groceries and ridesharing you around town. And yet, the Budget Lab at Yale University estimates there are only about 4 million workers in tipped positions in 2023 — about 2.5% of the entire U.S. workforce.

The most typical tipped work is in the service and hospitality industry. Tipped workers also tend to be younger than the rest of the working population — 20 to 34 years old, according to Yale Budget Lab.

In order to qualify as a tipped worker, you must earn more than $20 per month in tips. In tipped positions, workers must receive a subminimum wage, also known as a cash wage, of $2.13 per hour. A subminimum wage is combined with tips in order for workers to earn at least the federal minimum wage of $7.25 per hour. If an employee earns a subminimum wage plus tips less than $7.25 per hour, an employer must make up the difference.

There’s also something called tip pooling that’s often done in restaurants; it’s where the front of the house (servers and bartenders) share their tips with each other, as well as with the back of the house (such as cooks and dishwashers). In this scenario, all employees who receive pooled tips — including the workers who earn the tips — must make at least the federal minimum wage, according to the Department of Labor.

It’s unclear how often restaurants properly adhere to wage rules because tipping is notoriously underreported. Although, that’s less of an issue now since most people pay electronically and don’t leave cash tips as often anymore, says Howard Gleckman, senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute.

How do taxes on tips work?

Tips are considered taxable income. But not all income is taxed; that depends on the amount a worker actually earns.

Median weekly wages, including tips, are $538 among tipped workers, compared to a median of $1,000 among non-tipped workers, according to 2023 estimates by Yale Budget Lab. Many tipped workers earn so little they already aren’t required to pay federal income taxes; Yale Budget Lab estimates this is the case for about 37% of tipped workers.

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It’s likely only a small sliver of the tipped worker population would get the tax advantage that Trump and Harris propose — and that’s without knowing what specific income limits would be set by either candidate’s plan.

“Think about somebody who is a server at ‘Bob’s Diner’ — it has a $9.95 special and [the server] is going to get two bucks,” says Gleckman. “If you’re a server at some fancy downtown steakhouse where dinner is $200, you’re going to get 40 bucks, right? So for those higher income servers, this [policy] can make some difference. But for most people, it won’t really matter at all.”

There’s another important distinction about tips and taxes: Even when workers don’t have a federal income tax obligation, workers and their employers must pay federal payroll taxes, which fund Social Security and Medicare programs. That also means they must continue to report tips, even if federal taxes on tips are eliminated; also, the proposals would not affect state income tax requirements.

Neither Trump or Harris has specified whether their proposals would apply only to the federal income tax. But if the No Tax on Tips Act, introduced by Sen. Ted Cruz (R-Texas), is any indication, the exemption would likely only apply to federal income taxes.

How much would no-tax-on-tips save a typical tipped worker?

Tip earnings are hard to characterize since the amount varies drastically based on the type of service that workers provide, as well as local minimum wage laws. But the Tax Foundation offers an example: Say a server earns $19,000 per year in wages plus $15,000 in tipped income. Their adjusted gross income is $34,000. They take a standard deduction of $14,600, which leaves them with $19,400 in taxable income. Under this example they owe $2,096 in federal income taxes.

With a no-tax-on-tips policy in effect, their adjusted gross income is $19,000 since the $15,000 income in tips isn’t considered taxable. They take a standard deduction of $14,600, which leaves them with $4,400 in taxable income. Under this example, their tax liability is $440. It’s the difference of $1,656 from the previous example.

As the Tax Foundation points out, a cashier who makes the same $34,000 — without tips — would have the same $2,096 federal tax liability in either scenario, and so would be paying vastly more in taxes than the server under a no-tax-on-tips policy.

Experts say no taxes on tips is bad policy

Suffice to say, tax and wage experts are unimpressed with the no-tax-on-tips proposal.

“This wouldn’t help very many workers, and it could actually be very harmful to millions more, with the real benefits of this policy change going to employers and the wealthy at the expense of working people,” says Cooper.

Here are some reasons why experts say exempting tips from taxes could have negative repercussions, depending on how the policy is structured.

Social programs and other tax benefits could be impacted

If a no-tax-on-tips proposal includes an exemption for the payroll tax in addition to the income tax, it could impact both worker eligibility for Social Security and Medicaid, as well as the solvency of the program itself, says Cooper.

This scenario isn’t necessarily likely. Even though Trump has not specified if his proposal would apply to both the federal income tax and the payroll tax, Cruz’s No Tax on Tips Act applies the exemption only to the federal income tax. It’s difficult to see Harris applying the exemption to the payroll tax.

But depending on how the law is written, no-tax-on-tips could make it more difficult for workers to get other tax benefits like the earned income tax credit or the child tax credit, experts say.

“If you’re a household with children, those credits phase-in with earned income, meaning that they are larger the more income you earn, up to a certain point,” says Pomerleau. “But if you were to structure this tax exemption as an exemption from adjusted gross income, it would directly interact with the earned income tax credit in the child tax credit and reduce those benefits for households.”

No matter what, says Pomerleau, no-tax-on-tips would add tax complexity for a population of tax filers that, generally, do not have access to accountants to help them through the process. That could result in more workers not filing taxes or not being able to access the benefits they are eligible for.

High earners could find a loophole

A tax exemption on tips leaves open the possibility of exploiting the system. Some in high-income positions like lawyers, for example, could restructure how their earnings are reported to avoid paying taxes on a portion of their income.

“You could envision a lot of scenarios where this would be really grossly abused by highly paid individuals,” says Cooper.

The Harris campaign told The Washington Post that, under her plan, the tax exemption would only apply to workers who earn below a certain threshold in select industries. This would prevent high earners in nontraditional tipping positions from gaming the system. There is currently no bill from Democrats in Congress that matches Harris’ plan.

Trump’s proposal and the No Tax on Tips Act from congressional Republicans doesn’t narrow industry eligibility or impose income limitations.

It could reduce employers’ need to raise wages

The tax benefit presents a double whammy benefit to owners: a tax benefit that appeals to workers and an opportunity to save money by shifting the pay burden from owners to consumers.

“It’s a win-win for restaurant owners, hotel owners, like, for example, Donald Trump,” says Gleckman. “But it’s much more ambiguous and much riskier for tip workers, particularly low-income workers.”

Cooper says this policy won’t incentivize employers to raise raises for workers because there’s a tax benefit inherent to the job. But it could incentivize businesses to reclassify certain positions as tipped occupations.

“The tipping system, as it currently exists, is rife with wage theft and discrimination,” says Cooper. “It opens up workers to abuse from customers and colleagues because they feel like they have to tolerate bad behavior, lest they put their kids at risk. So this [policy] would grow a system that is problematic in a lot of ways and spread it to more occupations. That’s not something that we should be incentivizing.”

The deficit would increase, although not substantially

Tax cuts lead to a decline in revenue, which could, over time, exacerbate the federal deficit; it’s currently about $1.52 trillion, according to the U.S. Treasury. The Committee for a Responsible Federal Budget estimates the cost of exempting tips from federal income tax would be $100 to $200 billion over a decade. If tips are also exempted from payroll taxes, the total could run to $250 billion.

If the policy makes tips exempt from the payroll tax, it would have broader repercussions for Social Security and Medicaid programs, experts say.

“These programs are already facing a fiscal shortfall and will need to be dealt with, in as little as ten years,” says Pomerleau. “If they were to remove $38 billion, potentially from the face of Social Security and Medicare, I would accelerate this problem.”

It could exacerbate tipping backlash

As the CRFB notes, what’s not included in its calculations are changes in tipping behavior, which could result in consumers giving less than they do now if they perceive tipped workers as getting an unfair tax advantage.

A backlash to tipping culture has already resulted in 7% lower tipping among service-sector workers from November 2022 to November 2023, according to a payroll analysis by Gusto, a payroll provider.

It could fuel worker resentment

On the flip side, excluding certain tipped jobs by field or income could stir the pot among workers and the unions that represent them.

Cooper says, “Why would we be giving preferential income tax treatment to this very small subset of workers when there are lots of other hard working, low-paid workers — people providing daycare, childcare, eldercare — that this would do nothing for?”

Gleckman says the policy violates a “cardinal rule of good tax policy,” which is to tax people making the same income at the same level. “I’m not sure I quite understand why a low wage worker somehow should enjoy more benefits than a low wage worker of another kind who’s getting the same income,” says Gleckman. “If you really care for a bunch of low wage workers, there are plenty of other things you could do.”

Unions and businesses groups support no-tax-on-tips

Despite criticism of the no-tax-on-tips proposal, it would benefit workers who are eligible. Adding limitations by industry and income could prevent the exemption from being a regressive one.

Shortly after Harris’ announcement, Culinary Union Local 226 in Nevada endorsed Harris for president and lauded the proposal without acknowledging Trump’s. The union, along with the Bartenders Union Local 165, represents 60,000 workers in Las Vegas and Reno. The Culinary Union argues that the tax exemption could help millions of workers that earn a subminimum wage.

“The fact that many companies pay tipped workers across the country $2.13 an hour is outrageous and ending taxes on tips for service and hospitality workers would significantly help millions of workers provide for their families, including in Nevada,” the union wrote in its press release endorsing Harris.

Businesses that employ tipped workers also support the plan. At least, Cruz’s plan, which would not limit the exemption by industry and income. Two of the biggest associations for the top tipped industries — the National Restaurant Association and the Professional Beauty — both endorsed Cruz’s proposal.

“Tipped employees are a critical part of the restaurant industry, and anything that strengthens their economic condition is a positive for them,” said Sean Kennedy, executive vice president of public affairs for the National Restaurant Association in a press release announcing Cruz’s bill. “The ‘No Tax on Tips Act’ would provide immediate tax relief for more than 2.2 million restaurant employees and their families, putting more money in their pockets at a time when we’re all feeling the squeeze of higher prices.”

Ending the subminimum wage would pack a bigger punch

During the campaign rally in Las Vegas last weekend, when Harris made her promise to end tax on tips, she also said she would raise the minimum wage. What she didn’t promise to do is eliminate the subminimum wage, which would have a bigger impact on tipped workers.

“Why not do something like raise the minimum wage if you really want to improve outcomes for tipped workers in the United States?” says Cooper.

The federal minimum wage for all workers has been $7.25 per hour since 2009. However, 30 states plus the District of Columbia have set minimum wages above that amount. Again, the federal subminimum wage is $2.13 per hour. Right now, 36 states have set minimum wages for tipped workers below the federal minimum wage of $7.25 per hour.

The tipped workers who earn the most, nationwide, are in Los Angeles ($16.78 per hour); Seattle ($17.25 per hour); and New York City, where tipped workers earn $15 per hour with the exception of delivery workers, who earn a minimum of $17.96 per hour.

Other places have eliminated the subminimum wage practice altogether. So far six states have banned subminimum wages for tipped workers, including Alaska, California, Minnesota, Montana, Oregon and Washington.

“It is outrageous that over a million workers in this country are not guaranteed a fair minimum wage in 2024,” the Culinary Union 226 wrote in a release endorsing Harris’ proposal. “Employers across the nation need to take responsibility for paying a real minimum wage and Congress must ensure it.”

Beyond raising the minimum wage, there are other levers that could be pulled to help low wage workers, experts say. That includes expanding income supports like the child tax credit, the earned income tax credit or Medicaid.

Anna Helhoski writes for NerdWallet. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski.

Tips to keep back-to-school budgeting on track

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In 1996, Staples ran a back-to-school advertisement, using the classic 1963 Christmas song “It’s the Most Wonderful Time of the Year.”  My children are now in their 20s and 30s, but I still smile when I hear that song.

As a parent, I am reminiscent of the time when summer was over, and the new school year was about to begin. I loved our time off, but I also looked forward to the end of summer. The days would fall back into a routine, filled with structure and planned activities.

In May 2024, Deloitte surveyed about 1,200 parents of school-aged children to learn about their back-to-school shopping plans. The parents surveyed estimated that on average, they will spend $586 per child on school supplies and clothing. Additionally, the same parents estimated they will spend another $582 on extracurricular activities per child.

As a financial planner, I used back-to-school shopping as a learning opportunity for our children.

During the summer, we would establish a budget, identify what needed to be purchased, and estimate the cost for each item.

On the shopping day, I would withdraw cash from the bank and place it in an envelope, earmarked for each child. I wanted this process to be visual, so that as we spent money from the envelope, it was clear that the balance of the remaining funds available decreased.

Using an ATM or credit card would have been easier, but the emotional and visual impact would not have been the same. My objective was to teach budgeting without it being a chore. While hoping to make the experience memorable for us.

We would spend a day shopping, enjoy a special lunch at their favorite restaurant, while checking off our purchases from their lists. This worked for us because each child was engaged in the process and outcome.

They learned that if they choose to spend more on one item, then another item would need to cost less than planned or be eliminated from the list. They needed to prioritize what was most important and acknowledge that once the money in the envelope was spent, they were finished with their shopping.

This may seem a bit extreme, but the outcome was successful for our family.

Having a budget is important for financial success in all circumstances, especially for back-to-school shopping. It is hard to avoid overspending without a budget and a shopping list.

Back-to-school shopping can be stressful for parents and students. The parent may be concerned about their finances, and the child about fitting in at school. Sticking to a budget and agreed upon shopping list can help to minimize this stress for parents and children.

If your child is looking for a specific item, such as a brand name pair of sneakers, do some research online before you make a purchase. Often, you will find a coupon or promotion for the item that you are seeking.

Searching for coupons is one of the easiest and most effective ways to save money. Many companies offer products at a discount if consumers sign up for their email subscription, and there are many online services, websites, and browser plug-ins that can help locate the best deals on back-to-school supplies.

Buy in bulk for the year, during sales. Often, the stores will offer loss-leaders to draw you into the store. Select the items that are offered at a discount, then shop around or wait until the other items are on sale. Don’t be afraid to purchase generic brands as they may be manufactured by the name brand at a fraction of the cost.

To manage spending on supplies such as paper, binders, glue, and crayons, stick with the list of items your child’s school is suggesting. To help you with this, retailers such as Walmart allow schools to post on their website their suggested shopping list. Search” Find your school supply list,” and enter the school, city, and state. If you are fortunate enough that your school posted their list, completing your checklist online will be an easy task.

Be cautious about accumulating additional debt to purchase school supplies.  A recent NerdWallet survey found that more than half (58%) of parents’ plan on purchasing back to school items with credit cards. According to Forbes, as of August 1, 2024, the average credit card interest rate is 27.62%. This average card rate is calculated from a dataset of over 250 credit cards in the U.S. market. While credit cards are convenient, they are not the best form of payment if you are not able to pay them off monthly.

Tips to keep back-to-school budgeting on track

—Annually access the child’s back to school needs. Take inventory of the items you already have.

—Establish a budget.

—Regularly check for sales over summer break.

—Discuss ways to save money with your child and include them in the process.

—If you are using a credit card for purchases because cash is not available, over the next year, set aside funds in a separate account for the following school year.

—Plan to purchase basic supplies that are on sale throughout the year.

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—If you need to purchase books, search for used books.

Spend some time planning for this back-to-school season. Make the experience memorable for you and your children as you prepare them for their new school year. Then, on the first day of school, after you have dropped the kids off for the day, sit down with your morning coffee and remember, “It’s the Most Wonderful Time of the Year.”

Teri Parker CFP® is a vice president for the Riverside office of CAPTRUST Financial Advisors and has practiced in the field of financial planning and investment management since 2000. Contact her at Teri.parker@captrust.com.

Inver Grove Heights man fatally shot in Minneapolis

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An Inver Grove Heights man was shot to death during daylight hours last week in Minneapolis.

Shortly before 2 p.m. Thursday, Minneapolis Third Precinct Officers found D’Shawn JC Porter, 26, with a fatal gunshot wound to the back of his head in the 2900 block on 12th Avenue South.

Porter was pronounced dead at the scene, according to the Minneapolis Police Department. The Hennepin County Medical Examiner’s office identified Porter on Monday.

Minneapolis Chief of Police Brian O’Hara reported that Porter was with a group of people when an altercation with another man took place and shooting followed.

“This is the first murder of the month of August.” O’Hara said in a news release. “It’s difficult because it’s happened in broad daylight on a weekday afternoon and now there’s another family that’s here and is being torn apart by gun violence.”

The investigation is ongoing and no arrests have been made, police said Monday.

Anyone with information is asked to call CrimeStoppers at 1-800-222-TIPS (8477). Tips can be sent to CrimeStoppersMN.org.

All Tips are anonymous and persons providing information leading to an arrest and conviction may be eligible for a financial reward.

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Blinken says Israel agrees to a U.S.-backed proposal for a cease-fire and calls on Hamas to do same

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By MATTHEW LEE AP Diplomatic Writer

TEL AVIV, Israel (AP) — U.S. Secretary of State Antony Blinken said Monday that Israel has accepted a proposal to bridge differences holding up a cease-fire and hostage release in Gaza, and he called on Hamas to do the same, without saying whether it had addressed concerns cited by the group.

Blinken spoke after holding a 2 1/2 hour meeting with Israeli Prime Minister Benjamin Netanyahu earlier in the day, and was expected to travel to Egypt on Tuesday. The United States, Egypt and Qatar have spent months trying to broker an agreement, with the talks repeatedly stalling.

He did not say whether the so-called bridging proposal addressed Israel’s demands for control over two strategic corridors inside Gaza, which Hamas has said is a nonstarter, or other issues that have long bedeviled the negotiations. Hamas has been designated as a terrorist organization by the United States, Canada and the European Union.

“In a very constructive meeting with Prime Minister Netanyahu today, he confirmed to me that Israel supports the bridging proposal,” Blinken told reporters. “The next important step is for Hamas to say ‘yes.’”

Blinken had earlier said the time is now to conclude a Gaza cease-fire agreement that would return hostages held by Hamas and bring relief to Palestinian suffering after more than 10 months of devastating fighting in Gaza.

Blinken’s ninth mission to the Middle East since the conflict began came days after mediators, including the United States, expressed renewed optimism that a deal was near. But Hamas has expressed deep dissatisfaction with the latest proposal, and Israel has said there were points on which it was unwilling to compromise.

The trip, days before new talks expected this week in Egypt, came amid fears that the conflict could widen into a deeper regional war following the targeted killing of two top militants in Lebanon and Iran that were attributed to Israel.

“This is a decisive moment, probably the best, maybe the last, opportunity to get the hostages home, to get a cease-fire and to put everyone on a better path to enduring peace and security,” Blinken said as he opened talks with Israeli President Isaac Herzog in Tel Aviv.

“It’s also time to make sure that no one takes any steps that could derail this process,” he said in a veiled reference to Iran. “And so we’re working to make sure that there is no escalation, that there are no provocations, that there are no actions that in any way move us away from getting this deal over the line, or for that matter, escalating the conflict to other places and to greater intensity.”

Herzog thanked Blinken for the Biden administration’s support for Israel and lamented a spate of recent attacks against Israelis in the past 24 hours.

“This is the way we are living these days,” Herzog said. “We are surrounded by terrorism from all four corners of the earth and we are fighting back as a resilient and strong nation.”

Mediators will meet again this week in Cairo to try to cement a cease-fire. Blinken will travel to Egypt on Tuesday for meetings in the Mediterranean city of el-Alamein after he wraps up his Israel stop.

He met one-on-one with Prime Minister Benjamin Netanyahu for 2½ hours Monday and with Defense Minister Yoav Gallant later in the day.

The war began on Oct. 7 when Hamas-led terrorists broke into Israel, killing around 1,200 people, mostly civilians, and abducting around 250 others. Of those, about 110 are still believed to be in Gaza, though Israeli authorities say around a third are dead. More than 100 hostages were released in November during a weeklong cease-fire.

Israel’s counterattack in Gaza has killed more than 40,000 Palestinians, according to local health authorities, and devastated much of the territory.

Late last week, the three countries mediating the proposed cease-fire — Egypt, Qatar and the U.S. —reported progress on a deal under which Israel would halt most military operations in Gaza and release a number of Palestinian prisoners in exchange for the release of hostages.

Shortly before Blinken arrived in Tel Aviv on Sunday, Netanyahu told a Cabinet meeting there are areas where Israel can be flexible and unspecified areas where it won’t be.

“We are conducting negotiations and not a scenario in which we just give and give,” he said.

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The evolving proposal calls for a three-phase process in which Hamas would release all hostages abducted during its Oct. 7 attack. In exchange, Israel would withdraw its forces from Gaza and release Palestinian prisoners.

Hamas accuses Israel of adding new demands that it maintain a military presence along the Gaza-Egypt border to prevent arms smuggling and along a line bisecting the territory so it can search Palestinians returning to their homes in the north. Israel said those weren’t new demands, but clarifications of a previous proposal.

Officials said the U.S. has presented proposals to bridge all the gaps remaining between the Israeli and Hamas positions. Formal responses to the U.S. outline are expected this week and could lead to a cease-fire declaration unless the talks stall, as has happened with multiple previous efforts.

Late Sunday, Hamas said in a statement that Netanyahu has continued to set obstacles to a deal by demanding new conditions, accusing him of wanting to prolong the war. It said the mediators’ latest offer was a capitulation to Israel.

“The new proposal responds to Netanyahu’s conditions,” Hamas said.

Blinken said Monday both sides should take this opportunity to reach a deal.

“It is time for everyone to get to ‘yes’ and to not look for any excuses to say ‘no,’” he said.

An Israeli delegation held talks with Egyptian officials as part of the truce efforts, an Egyptian official said Monday.

The hourslong meeting Sunday focused on the Philadelphi corridor along the Gaza-Egypt border, but didn’t achieve a breakthrough, according to the official, who spoke on condition of anonymity to discuss the ongoing negotiations.

The official said that Israel still insists on keeping control of the border and the east-west route that bisects Gaza. He said that the delegation didn’t offer anything new in their meeting.

Samy Magdy contributed to this report from Cairo.