In a unanimous 100–0 vote, the U.S. Senate has passed the “No Tax on Tips Act”, a sweeping new proposal aimed at eliminating federal income taxes on tipped wages — up to $25,000 per year for most eligible workers. Introduced by Senator Ted Cruz (R-TX) and supported by a bipartisan group of lawmakers including Jacky Rosen and Catherine Cortez Masto (both D-NV), the bill now heads to the House of Representatives for further consideration.
If signed into law, this change could reshape how income is reported in industries that rely heavily on tipping — and it may also open new doors to homeownership for millions of Americans.
How the No Tax on Tips Act Works
The legislation would exempt cash and credit card tips from federal income taxes — up to a cap of $25,000 per year — for individuals earning under $160,000 annually. The exemption would apply regardless of how tips are collected, whether directly from customers or distributed by employers.
According to a summary of the bill, the U.S. Treasury Department would be tasked with issuing formal rules and definitions. It remains unclear how employers will be required to report qualifying tip income, and how those earnings will be tracked in compliance with IRS regulations.
Key provisions include:
- A $25,000 per year federal income tax exemption for tipped earnings
- An income eligibility limit of $160,000 per year
- Sunset clause in 2028 unless extended by Congress
- Revenue offset to be considered as part of a broader tax reform package
The bill is being considered both as a standalone measure and as part of the GOP’s broader “One Big Beautiful Bill” — a comprehensive tax and spending package expected to define much of the 2025 legislative session.
President Trump, who campaigned on the proposal during the 2024 election cycle, has voiced strong support, calling it “a raise for service workers without costing businesses a dime.”
A Potential Boost for Mortgage Access
For workers who earn most of their income in tips — restaurant servers, delivery drivers, bar staff, hospitality workers, stylists, and many others — the bill could represent more than just a tax break. It could be a new path to mortgage eligibility.
Historically, tip-based income has often gone underreported. Workers who feared a higher tax bill sometimes minimized the amount of income they claimed — reducing not only their reported earnings but also their ability to qualify for a mortgage.
“This change encourages full reporting of income without penalty,” said a senior loan officer with experience in underwriting tip-based borrowers. “When income is fully documented, the borrower’s purchasing power often increases significantly.”
Here’s how the change could affect mortgage qualification:
Higher Reported Income
With the tax burden reduced or eliminated, more workers may choose to report tips accurately — boosting their adjusted gross income and improving their debt-to-income (DTI) ratio.
Improved Documentation
Lenders require consistent documentation of variable income. This includes:
- Two years of tax returns or W-2s showing tip income
- Employer letters verifying expected future income
- Bank deposits that match reported earnings
Loan Program Implications
- Conventional Loans (Fannie Mae & Freddie Mac): Typically require a 2-year average for variable income, but may accept a shorter history with documentation.
- FHA Loans: Often allow just one year of stable tip income.
- VA Loans: Require verification of ongoing employment and stability of variable income.
- USDA Loans: Apply stricter rules and may cap variable income more conservatively.
For first-time homebuyers or workers with fluctuating earnings, this shift could result in larger loan approvals, improved credit evaluations, and better access to down payment assistance programs.
Supporters Say It’s a Win for Workers
Proponents of the legislation argue that it provides meaningful relief without burdening small businesses. Because employers are not required to increase wages, the bill avoids additional payroll costs — while still improving worker take-home pay.
Supporters also highlight:
- Increased transparency in income reporting
- Lower administrative burdens for tip-based workers
- More accurate qualification for public programs and loans
- A sense of fairness in acknowledging the reality of modern service work
The National Restaurant Association, a major industry group, applauded the bill, stating that it would help attract and retain talent in the service sector while boosting disposable income for millions.
Critics See Risks for Wages and Equity
While bipartisan support in the Senate suggests broad appeal, the bill is not without its critics. Several labor economists and policy experts have voiced concern that the exemption could have unintended consequences, including:
- Reduced pressure on employers to raise base wages, especially in low-income industries
- Expansion of tipping culture into new sectors like retail or healthcare, increasing consumer burden
- Disproportionate benefit to higher-earning tipped workers, such as luxury service employees, while offering little to low-wage earners who already pay minimal income tax
The Economic Policy Institute (EPI) warns that the bill could lead to greater income instability and growing wage gaps — particularly if businesses reduce guaranteed pay in favor of variable, consumer-funded compensation.
Additionally, analysts at Yale’s Budget Lab point out that workers in high-tip environments (such as casinos or resorts) may receive the largest tax savings, while those in struggling restaurants or small towns may see no meaningful change.
Legislative Outlook: What Happens Next
The bill’s next stop is the House of Representatives, where lawmakers are considering two potential paths:
- As part of a comprehensive tax reform package, expected later this summer
- As a standalone measure, which could be fast-tracked if bipartisan support holds
According to the nonpartisan Joint Committee on Taxation, the proposal could cost the federal government an estimated $11 billion over 5 years, depending on how many workers take advantage of the exemption and how compliance is enforced.
If the bill is enacted, final implementation rules will be issued by the Department of the Treasury in consultation with the IRS.
What Tip-Based Workers Should Do Now
For service workers or self-employed individuals who earn tips, now is a good time to:
- Start fully documenting tip income
- Gather pay stubs, W-2s, and deposit records
- Talk with a mortgage professional about qualification strategies
Even before the bill becomes law, preparing your financial documents can help position you for success. If passed, the tax exemption could unlock new opportunities for homeownership by helping tip-based income count more fully in the eyes of lenders.
Final Thoughts
The “No Tax on Tips Act” is more than a tax provision — it could reshape how service workers are treated in financial systems that have long undervalued variable income.
Whether passed as a standalone bill or folded into a broader tax reform package, the measure has the potential to:
- Increase take-home pay
- Encourage income transparency
- Improve access to credit and mortgages
As the bill moves through Congress, workers, employers, and mortgage professionals alike should prepare for the possible changes ahead.
