How Trump’s new tax law affects tips, overtime, Social Security and more

President Donald Trump’s new tax law runs hundreds of pages and contains myriad changes to the tax code.

Some provisions have gotten more attention than others, including those dealing with taxes on tips, overtime and Social Security.

Adam Chodorow is a professor at Arizona State University's Sandra Day O’Connor College of Law and specializes in tax law. He joined the Show to talk about some elements of this new law.

Full conversation

MARK BRODIE: Adam, let’s start with the lower tax rates that had been enacted temporarily during President Trump’s first term. This bill made them permanent — so what kind of impact might that have on the amount people pay in taxes and the amount of revenue the federal government collects?

ADAM CHODOROW: It’s actually going to have quite a big impact. They lowered the tax rates, and as a result — especially if you are on the wealthy side of the scale — you’re going to save a lot of money as a result of this. The people in the middle and at the lower ends don’t save so much, but they also don’t pay that much in taxes.

This is just a necessary feature of lowering tax rates. The wealthy tend to benefit more than the poor.

BRODIE: Well, so this was one of the both selling points and criticisms of the initial round of tax cuts and this one as well, which is that it’s a big tax cut for people who make more money. I wonder what this does, given, as you say, this is kind of how tax cuts work.

What does that mean for sort of the average taxpayer, not somebody at the very top of the scale, not somebody at the very low end, but people in the middle?

CHODOROW: The average taxpayer is probably going to save hundreds of dollars. So it’s not, I don’t mean to suggest that $100 saved is meaningless, but compared to the $50,000, $100,000 or more that some of the upper earners are saving, it’s really not that much. But remember, there are a lot of people in that range.

And one of the real problems with the bill is that by cutting the rates, it reduces government revenues. And so if you were paying attention, you heard that this bill is going to increase the deficit by something like $3.7 trillion over a 10-year window. And a lot of that — not all, but a lot of that — is making these rate cuts permanent.

BRODIE: So one of the other things that this bill does is it does away with taxes on tips and taxes on overtime. And one of the selling points of these provisions were that it helps maybe some of those folks at the middle to lower end of the economic scale in terms of giving them more income that they don’t have to pay taxes on.

And you and I have talked about sort of the policy behind no tax on tips and overtime in the past. But in your mind, does this make up for any of what that population might be losing?

CHODOROW: Well, the first thing to note is that while the rate cuts were permanent, the no tax on tips, no tax on overtime are not permanent. They only last until 2029. And they did this actually the last time around. They made some things permanent, some things temporary. The permanent things tended to help the wealthy. The temporary things tended to help those who were not as well off.

So this will help some people, but it only helps you if you earn tips, and it only helps you if you get overtime pay. And while there are lots of people who get tips and lots of people who earn overtime, there are plenty of people who are not well off, who are salaried, who don’t have that opportunity or don’t work in industries where you get tips, and they don’t get the benefit of these provisions.

BRODIE: Do you anticipate — I mean, this is something you talked about in the past — more workers or employers even trying to work out arrangements where parts of their salary are considered tips so they don’t have to pay tax on it?

CHODOROW: Well, Congress, while they do a lot of dumb things, thought about this one. And so the rule says that it has to be tips in industries where tips were common or prevalent as of December 31, 2024.

BRODIE: So not, for example, professor or radio journalist.

CHODOROW: Yes, my brilliant plan to ask for less salary but tips so I could escape tax unfortunately has been undone. And the IRS is supposed to issue a list of the industries in which tips were deemed sort of traditional.

BRODIE: OK, so it’s just for a specific population of people. I wonder if that sort of ameliorates your concerns with some of that policy, because I know that you were concerned that more and more people — physicians and lawyers, for example — might try to work around the system to try to get more of their pay in tips and get away with not paying taxes. It sounds like that’s not really going to happen.

CHODOROW: It all depends on what the IRS does when it announces which industries typically get tips. So obviously waiters, maybe hairdressers —

BRODIE: Bartenders.

CHODOROW: Bartenders. But I guarantee you there will be some serious lobbying and saying, “Well, no, wait, I can show you an example where a plumber got a tip once, and therefore plumbers should be included.”

And so we’ll see what the IRS ultimately decides. But yes, this should cabin some of the problems. And there’s actually one thing that we didn’t talk about last time, because we didn’t know what shape this would take.

We talk about no tax on tips, but we need to be really careful. You include all of your tips in income, and then you get a deduction that will offset the amount of tips. And the maximum deduction for people is $25,000. So if you earn $30,000 of tips, you have to include all $30,000 and you get to deduct $25,000.

BRODIE: So you pay tax on $5,000 worth of your tips.

CHODOROW: Correct.

BRODIE: I want to ask you about Social Security also, because this was another big component of this ‘One Big Beautiful Bill’: not taxing Social Security benefits. What kind of impact might that have?

CHODOROW: Yeah. So to begin, we need to be really careful because that’s how the government is spinning it. They’re saying, “We’re not going to tax Social Security benefits.” But if you look through the tax code as it’s been amended, there is no provision in there that says we will not tax Social Security. If you remember, there used to be this thing called a personal exemption.

And so after you figured out your adjusted gross income, you would subtract a personal exemption for you, your spouse, your kids. All of that has gone away under the new bill, but they said — again, temporary — we will give anybody who is 65 years old or older a $6,000 exemption. It says nothing about Social Security. So there are people who start taking Social Security at age 62.

BRODIE: That doesn’t apply to them.

CHODOROW: They don’t get this deduction. So their Social Security is fully taxed. There are people who delay getting Social Security until they’re 70. They’re going to get this exemption amount of $6,000 even though they don’t get Social Security.

And so what the spin that’s being put on it is that we put this into the code to sort of offset the taxes on Social Security, but they haven’t gotten rid of those taxes, and they’re going to end up taxing some people who get Social Security and giving a benefit to people who aren’t getting Social Security.

And there’s also a phaseout. So this benefit of no taxes on Social Security actually applies to a very small number of people.

BRODIE: So given that the tax code changes not infrequently, right. That’s a fair assessment. In the universe of changes to the tax code, how big is this one and how easy or difficult do you think it will be for the IRS to implement all of this before tax time coming up in the spring?

CHODOROW: I mean, this has made a lot of changes to the code. We’ve talked about a couple. This is going to be hard. This is going to be very hard for the IRS. Every time there’s a change in the code, the IRS has to retool its system and make sure that its forms and everything are designed appropriately.

And the problem here is one, this was done in the middle of the year and two, the IRS has lost a ton of people as a result of the DOGE cuts and the retirement incentives that they sent out. Actually they just lost another IRS commissioner, and there are some real concerns about whether the IRS is going to have its act together.

And this could be a problem. I mean, maybe they pull it all together. But for those who like to worry, this is something else to worry about.