At the core of the law is the permanent extension of existing tax cuts, coupled with several targeted provisions. These include tax-free overtime pay, expanded deductions for seniors, and most notably, the exemption of tips from federal income tax. The tip exemption directly affects millions of service-sector workers—such as restaurant staff, bartenders, hotel employees, and delivery drivers—whose income often depends heavily on gratuities.
Under the new law, tips must still be reported but are no longer subject to federal income tax. Automatic service charges, salaries, and income from professional trades remain fully taxable, narrowing the scope of the exemption and drawing a clear line between tipped compensation and other earnings.
