President Trump promised that there would be “No Tax on Social Security,” “No Tax on Overtime,” and “No Tax on Tips.” However, the reality turns out to be less than what was promised.
There is actually nothing in the tax bill passed last summer that eliminates a tax on Social Security. Taxes will be assessed on Social Security income in the same way they always have been (actually, since 1983, when amendments to Social Security were passed). There is, instead, a deduction for taxpayers who are 65 years of age or older ($6,000 for single filers, $12,000 for married couples filing jointly). This is not the same population that receives Social Security, although there is, of course, overlap. But bottom line: not all taxpayers who are receiving Social Security, even if they receive this deduction, will escape a tax on Social Security.
Taxpayers likewise might be surprised that part of overtime pay still will be taxed. If a person works overtime at time-and-a-half pay, they can only deduct the “half.” For example, if someone is paid $20 per hour and they work an hour of overtime at time and a half, they will receive $30 overtime pay. But they can only deduct what is over and above their usual pay rate of $20 an hour. So they can only deduct $10, and $20 of their overtime pay is still subject to taxation. Worse still, if they work double time and get paid $40 for one hour of overtime, they are still treated as if they worked time and a half. So they can still only deduct $10 of overtime, and now $30 of their overtime pay will be taxed. Also, there is a limit of $12,500 ($25,000 if married filing jointly) of overtime pay that can be deducted.
It is also misleading to say that there are no taxes on tips. First, only people working in occupations approved by the IRS will be eligible for the deduction. Second, only $25,000 in tips can be deducted per return. So even if married taxpayers file a joint return and they together have more than $25,000 in tips, they can still only claim $25,000. Third, the deduction only counts “voluntary” tips, so it excludes tips if they are automatically calculated by management and added to the bill for a large group.
There are further problems with all three of these tax deductions. There are income limits beyond which the deductions disappear. Taxpayers who are married but don’t file a joint return with their spouse are ineligible for these deductions. And these deductions are temporary; they are only valid through tax year 2028.