President Donald Trump’s ambitious new legislation, often referred to as a “megabill,” has transitioned into a significant law with extensive ramifications affecting numerous Americans. This legislation, which is nearly 900 pages in length, purports to enhance the economy and increase disposable income, particularly for hourly wage earners. However, the complexities inherent in such a vast legal document—as well as the numerous amendments made at the last minute—suggest that the consequences may not be as straightforward as they seem.
The rapid passage of this law, described by Nisha Verma, a partner at Dorsey & Whitney’s labor and employment department, as occurring “overnight and on a holiday weekend,” has left many experts pondering its real-world effects. As Verma notes, while this legislation promises substantial changes to the lives of Americans, much remains to be understood about its implications.
Key provisions of this law could potentially influence the economic landscape for American workers. A noteworthy proposal from the ongoing 2024 presidential campaign is related to tax-free tips, supported by both Trump and Vice President Kamala Harris. However, skeptics, including tax professionals and economists, argue that the costs of such proposals may outweigh the advantages, potentially leading to reduced wages for lower-income employees and the risk of abuse through deductions.
Under the newly implemented One Big, Beautiful Bill Act, workers can now deduct up to $25,000 of received qualified tips from their taxable income annually. This provision, which is capped for individuals earning under $150,000 annually (or $300,000 for married couples filing jointly), retroactively applies to the 2025 tax season. Classified as an above-the-line deduction, this benefit stands to assist both those who take standard deductions and those who itemize their deductions.
Nevertheless, it’s essential to note that this tax break isn’t permanent, as it is set to expire at the conclusion of 2028. “Qualified tips” are defined as cash tips given voluntarily to employees in traditionally tipped occupations, with additional guidance anticipated from the Treasury Department regarding which job sectors qualify.
While the elimination of taxes on tips seems beneficial at first glance, economist Martha Gimbel highlights the underlying complexities. Many individuals may overlook the fact that they were already exempt from federal income tax on their tips due to their overall income levels. This potential for misunderstanding underscores the intricacies of the new law and its several effects on individuals working in service sectors.
Additionally, the changes regarding tips may stir up unexpected outcomes in the labor market, particularly for service industry professionals. Verma questions whether the newfound value of tips could result in increased scrutiny of existing pooling rules or prompt servers to challenge current practices. Increased tip value might also deter employers from providing wage raises or drive policymakers to consider adjusting the tipped minimum wage, which remains stagnant at $2.13 per hour.
On a broader scale, the legislation includes an above-the-line deduction for overtime pay, which allows a deductible of up to $12,500 ($25,000 for joint returns) for individuals earning under $150,000 annually. Taking effect in the 2025 tax year, this provision will also expire at the end of 2028, applying solely to federal taxes. Critics warn that while proposals to eliminate taxation on overtime might gain traction in various states, such measures could inadvertently promote excessive work hours and exploitative practices for higher earners.
Workers also look towards new provisions like the Workforce Pell Grants, which aim to broaden access to education grants for individuals in high-skill, high-demand job training programs, and the enhancement of child care credits for employers. These changes intend to foster workforce participation, particularly among women, and address a crucial need for skilled labor.
Finally, the law solidifies a permanent tax-free avenue for employers to assist employees with student loan repayments, raising the limit to $5,250, which will be inflation-adjusted in $50 increments starting from 2026. Despite this, research shows that the advantages of such provisions are unevenly distributed, with higher-earning, white-collar workers benefitting predominantly, while lower-income earners have significantly less access.
In summary, the new law introduced by President Trump is a multifaceted piece of legislation offering various benefits while also posing challenges and raising questions about its overall long-term impacts on American workers and the economy at large. The complexities of its provisions necessitate careful consideration and further analysis as the legislation unfolds and its effects on the workforce become clearer.
