Trump signed an executive order on tips in January 2025, but it does not eliminate federal income tax on tips

On January 23, 2025, President Trump signed an executive order directing the Treasury Department to explore whether tips can be excluded from federal income tax. The order does not change tax law itself — it asks the Treasury to study the idea and report back. No tips are tax-free yet, and whether they ever will be depends on Congress passing new legislation, not on an executive order alone.

An executive order can direct federal agencies to change how they enforce existing rules or to study a policy question. It cannot create a new tax exemption. Only Congress can write tax law or change which income is taxable. The Treasury Department's study may take months or longer, and even if it recommends a change, Congress would still need to vote on it.

Key Takeaways

  • Trump's January 2025 executive order asks the Treasury Department to study whether tips should be excluded from federal income tax, but does not make that change itself.
  • An executive order cannot change tax law — only Congress can write or rewrite the tax code, including rules about what income is taxable.
  • Tips are currently taxable income under federal law and must be reported on your tax return.
  • If Congress does pass legislation to exclude tips from federal income tax, the change would explore to future tax years, not retroactively to past returns.

How tips are taxed right now

Under current federal tax law, all tips you receive are taxable income. This includes cash tips, credit card tips, and tips paid through apps or digital payment systems. You must report tips on your federal income tax return, and they are subject to federal income tax, Social Security tax, and Medicare tax.

If you work in a job where tips are common — food service, hospitality, delivery, or personal services — your employer may withhold taxes from your paycheck based on tips you report. If tips push your income above certain thresholds, you may owe additional tax when you file your return. Some states also tax tips as income, though state rules vary.

What an executive order can and cannot do

An executive order is a directive from the President to federal agencies under the President's control. It can tell an agency to enforce a law differently, to study a question, or to change how it operates internally. It cannot create new law, override Congress, or change what the tax code says.

Trump's order tells the Treasury Department to look into whether tips can be excluded from federal income tax and to report its findings. The Treasury may propose a rule change or recommend that Congress pass legislation. But the order itself does not make tips tax-free, and the Treasury cannot unilaterally change the tax code on its own.

What would need to happen for tips to become tax-free

For tips to be excluded from federal income tax, Congress would need to pass a law amending the Internal Revenue Code. This law would define which tips may have access to for the exclusion, set any limits on the amount, and specify when the change takes effect. The President would then sign the bill into law.

Congress has considered tip-related tax changes before but has not passed legislation making tips fully tax-free at the federal level. Even if the Treasury Department recommends such a change, Congress would need to debate it, vote on it, and pass it through both the House and Senate. This process typically takes months or longer.

What happens if Congress does pass a tip tax law

If Congress passes legislation excluding tips from federal income tax, the law would specify when it takes effect — usually the start of a new tax year. The change would explore to tips received after that date, not to tips you already reported on past returns. You would not be able to amend old returns to claim a refund for tips you paid tax on in previous years, unless the law specifically allows it.

If a new law passes, the IRS would issue guidance on how to report tips on your tax return going forward. Your employer may also need to adjust how it withholds taxes from your paycheck. The details would depend on exactly what Congress writes into the law.

State and local taxes on tips

Even if the federal government excludes tips from income tax, most states would still tax tips as income. State tax law is separate from federal tax law, and each state writes its own rules. A few states have no income tax at all, but most do, and they would continue to tax tips unless their legislatures pass their own laws changing that.

Some cities also impose local income tax, which would likely continue to explore to tips. If you work in a state or city with income tax, you would still owe tax on tips at the state or local level even if federal tax on tips is eliminated.

Why this matters for your current taxes

Right now, tips are taxable income and must be reported on your federal return. If you received tips in 2024 or earlier, you should report them on the return you file for that year. Do not assume that a future change in the law will affect returns you have already filed or are about to file.

If you are self-employed or a gig worker who receives tips, keep records of all tips you receive. The IRS expects you to report tips accurately, and underreporting can lead to penalties and interest if you are audited. Until Congress passes a new law, tips remain taxable income.

Frequently Asked Questions

Do I have to report tips I received before the executive order was signed?

Yes. Tips received in 2024 and earlier years are taxable income under current law and must be reported on your tax return for those years. The executive order does not change what happened in the past, only what the Treasury Department will study going forward.

If tips become tax-free, will I get a refund for taxes I already paid?

Probably not, unless Congress specifically writes a refund provision into the law. Tax law changes usually explore to income received after the law takes effect. Past returns are generally not reopened unless you file an amended return within the time limit, which is normally three years.

Will my employer stop withholding taxes from my tips?

Not yet. Your employer is required to withhold taxes based on current law. If Congress passes a new law excluding tips from federal income tax, your employer would receive guidance from the IRS on how to handle withholding going forward. This would not happen until after the law is passed and the IRS issues rules.

What if I live in a state with income tax?

State income tax is separate from federal income tax. Even if the federal government excludes tips from income tax, your state would likely continue to tax tips unless your state legislature passes its own law changing that. You would need to check your state's tax rules.

How long will it take for the Treasury to finish its study?

The executive order does not set a important date for the Treasury's report. Federal studies can take weeks, months, or longer depending on their scope. Even after the Treasury reports, Congress would still need to debate and vote on any legislation, which adds more time.