By Contributor,Mandel Ngan,Peter J Reilly

Copyright forbes

TOPSHOT – US President Donald Trump visits with patrons at a craps table at Circa Resort & Casino, following his remarks on his policy to end tax on tips in Las Vegas, Nevada, on January 25, 2025. After visits to disaster sites in North Carolina and California, the Vegas stop is more of a feel-good victory lap, as he lays out his plans to exclude tips from federal taxes — an enormously popular move in a city built on the hospitality industry. (Photo by Mandel NGAN / AFP) (Photo by MANDEL NGAN/AFP via Getty Images)
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Shortly after the release of the One Big Beautiful Bill, I noted an apparent marriage penalty in the No Tax on Tips provision. My friend Grok told me that I was the first commentator to take note of it, but I take compliments from Grok with a grain of salt. You can’t take the “No Tax” in the title literally. The provision is an income tax deduction subject to a phase-out, which I’m not going to get into here and a limitation, which is where the marriage penalty comes in.

The Limitation

Both the tips deduction and a similar overtime deduction require that married taxpayers file a joint return in order to claim the deduction. And they both have a limitation. In the case of the overtime deduction it is $12,500 on a single return and $25,000 on a joint return. For the tip deduction the limit is $25,000. So it is a better deal for single well-tipped individuals than it is for single individuals who work a lot of overtime. Looking at it negatively, though, there could be a significant marriage penalty for well tipped individuals who tie the knot. They had a $25,000 deduction limit on each of their single returns or a total of $50,000 and now they share a $25,000 limit.

Nevada Congresspeople Weigh In

I wasn’t the only person to notice this. Most notably the Democrats in Nevada’s congressional delegation noticed. They joined in writing a letter to the IRS encouraging IRS to interpret the “No Tax on Tips” provision in a taxpayer friendly manner. The letter, signed by Senators Masto and Rosen and Representatives Titus, Horsford and Lee, addresses issues like auto-gratuities, the Gaming Industry Tip Compliance Agreement, joint returns with ITINs rather than Social Security numbers, specified service trade or business restrictions, which I addressed here, and the marriage penalty.

Here is what the senators and representatives have to say about the marriage penalty.

“Section 70201 provides that “the amount allowed as a deduction under this section for any taxable year shall not exceed $25,000” but does not specify if this amount applies in the case of a joint return. Such an interpretation would create a substantial marriage penalty for couples with two tipped wage earners and we urge IRS and Treasury to allow up to $25,000 per individual, even if filing jointly as mandated by the statute for married couples. A $50,000 cap on joint returns aligns with Congressional intent, as evidence by the phase out language under §224(b)(2)(A), which states that the deduction is reduced “by $100 for each $1,000 by which the taxpayer’s MAGI exceeds $150,000 ($300,000 in the case of a joint return).” It is clear from this language, which provides for a phaseout at double the income level for joint returns, that Congress intended the deduction cap to be doubled in the case of a joint return and for the $25,000 limit to be applied on an individual basis.”

That thing about it being clear that Congress intended that the deduction cap be doubled is a little suspicious. The language on overtime does double the cap from $12,500 to $25,000 so they clearly know how to have language that doubles a cap.

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From The IRS

The IRS has issued a draft form (Schedule 1-A) to summarize the new deductions from the One Big Beautiful Bill and it appears that it is leaving the marriage penalty intact. We see Line 7 in Part II No Tax on Tips “Enter the smaller of the amount on line 6 or $25,000”. By way of contrast we see in Part III No Tax on Overtime Line 15 “Enter the smaller of the amount on line 14c or $12,500 ($25,000 if married filing jointly). Both parts include a caution that joint filing is required for married taxpayers to claim the deduction.

I thought it likely that IRS would create a new form to summarize the deductions. Parts IV and V cover No Tax on Car Loan Interest and Enhanced Deduction for Seniors. Interestingly, the car loan interest deduction does not require joint filing. A couple with two pricey cars should run the numbers on separate filing this year.

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