The "No Tax on Tips" proposal, while seemingly straightforward, harbors a multitude of complexities that warrant thorough examination. In this installment of "Money Talks," I, Joy Silver, am joined by financial expert Cindy Barone, a Certified Financial Planner with extensive experience, to elucidate the intricacies of this policy. We delve into critical concepts such as the differentiation between "above the line" and "below the line" tax adjustments, as well as the pertinent income thresholds and qualification criteria that determine who may benefit from this initiative. Furthermore, significant caveats are highlighted, including the limitations on eligibility and employer reporting obligations, which can complicate the intended benefits for tipped workers. Ultimately, our discussion reveals that, for some low-income individuals, the implementation of this policy may inadvertently jeopardize access to essential tax credits, thereby underscoring the need for a nuanced understanding of its implications.

The discussion surrounding the much-publicized proposal of eliminating taxes on tips is far more intricate than the initial allure of tax relief might suggest. In this segment of 'Money Talks,' financial expert Cindy Barone, a Certified Financial Planner with extensive experience, elucidates the multifaceted nature of this policy. She articulates the fundamental differences between 'above the line' and 'below the line' tax adjustments, shedding light on how these classifications impact the taxable income of tipped workers. The episode meticulously unpacks the eligibility criteria, highlighting the income thresholds that dictate who stands to benefit from this policy. As Barone explains, while the proposal purports to assist those who rely heavily on tips, it is laden with caveats that could undermine its intended effect. Notably, some low-income workers may inadvertently forfeit access to critical tax credits, thereby complicating their financial situations. This nuanced exploration provides listeners with a grounded understanding of a proposal that, on the surface, seems beneficial but, upon closer examination, reveals a landscape fraught with complexities and potential pitfalls. The conversation serves as an important reminder that financial policies have real-world consequences, urging listeners to scrutinize the fine print before celebrating any perceived gains.

Takeaways:

1. The 'No Tax on Tips' proposal is an above-the-line adjustment that complicates tax calculations for tipped workers.
2. Eligibility for the proposed tax exemption is limited and contingent upon specific income thresholds that may exclude many workers.
3. Automatic gratuities and mandatory service charges do not qualify as tips under the new proposal, which could adversely affect income for some workers.
4. Low-income workers may inadvertently lose access to valuable tax credits as a result of their adjusted income from this proposal.
5. The success of the 'No Tax on Tips' policy hinges significantly on employer participation and accurate reporting of tips.
6. The complexity of the proposal necessitates a thorough understanding of tax implications for all stakeholders involved.

Companies mentioned in this episode:

1. United America Network
2. Cindy Barone, CFP and Associates

Hello, everybody.

This is the Joy of Democracy Show.

I am Joy Silver, your host of Joy of Democracy here on United America Network.

And this segment was called Money Talks.

And we are lucky enough.

Well, let me just say we are very excited to have Cindy Barone, CFP and Associates.

She is the owner of that.

She's been the owner for a long time.

Yeah, definitely.

And I know you've seen some changes there, Cindy, have you not?

What did you.

Well, the biggest change, like I had mentioned to you earlier, we no longer use pencils.

There you go.

We're not using pencils anymore.

And that can be, that can be an issue, too, because, hey, you make a mistake, you just can't wipe it out.

So she does do tax preparing here in Palm Springs and several other states, as I understand it.

But can you tell our audience right now and those who are listening to us, what does CFP mean on the end of your name?

It means certified financial planner.

And that's about the investment side of my business.

But it works really well in a tax situation because to have someone who does your financial planning or investment planning that doesn't understand taxes the way we do can lead you down a path you don't necessarily want to go down.

Yes.

And there's a lot of paths we don't want to go down when it comes to taxes.

And that's why we're here to listen to you today.

You know, one of the main things that's happening out there from this regime is supposed to be something that's so, I don't know, totally fabulous.

And that would be the no tax on tips idea.

And so maybe, Cindy, you could explain to our listeners what the hell is going on with no tax on tips.

I don't know if it's explainable, but we're going to, we're going to do our best.

It's pretty convoluted.

Yeah.

Nothing's cut and dry or black and white, which are my two favorite colors.

But to explain it as best I can without making everybody fall asleep, it's like when I start a conversation.

Would you like to hear a really boring story?

So no tax on tips.

It starts with what's called above the line and below the line.

So they call them both deductions.

But really an above the line is an adjustment to your income.

And the line, the secret magic line, is your adjusted gross income.

Now, where do they find this?

Where do they find these lines?

Are you talking about a form that they have to fill out.

Yeah.

Okay, and that's the usual one, right?

That is the usual one.

And that's your federal tax return.

Okay, so we're talking about the feds now.

So let's get that zero in on that just for a second.

You have above the line adjustments to income and you have below the line deductions from income.

One is more advantageous than the other.

And above the line literally reduces your adjusted gross income.

So if you had, for instance, $10,000 in an above the line adjustment to your income and you earned 110,000, it's as though you earned 100,000.

Oh, I see.

And a below the line adjustment is really your deductions, which usually shows up on schedule A, which are not for everybody.

But in the event that you file a schedule A, it would be things like your home mortgage interest, charitable deductions, your salt, which is state and local taxes, which we're going to talk about later.

There's no pepper, just salt.

And that reduces your taxable income, but in a different way because it's not dollar for dollar.

So the no tax on tips is actually an above the line adjustment to your income.

And that sounds great, but it does come with a few dings and dangs and some caveats.

Oh, gosh.

Okay, here we go, we go.

The no tax on tips is you're above the line.

So we know that it reduces your taxable income versus.

So it's an adjustment.

And the first thing is you can take $25,000 worth of tips.

So everybody's like, wow, great, I'm going to take that $25,000.

But there's hurdles.

And the hurdles is that your income can't be over a certain amount.

And it's a pretty high number.

They do get adjusted up in 26, and that's.

So that's 300,000 for a couple who are filing together.

The other thing is, is the tips have to be what's called a qualified tip.

Well, what's a qualified tip?

What is a qualified tip?

And the reason they came up with this, in theory, the idea was good, how it plays out, some of it's good, some of it not so good.

And I think this is the most complicated of the tax changes.

So a qualified tip is you are a waitress in a, in a, a diner.

Okay, yeah, let's go with that.

So here I am, I'm a hard working woman.

I'M over there, I'm serving people and they're tipping me now.

And keep in mind that the people that this will impact the most are.

It's unevenly skewed towards women.

Oh, wow.

Because women are more likely to be a tipped employee.

Okay, okay.

All right.

And about three, two and a half to 3% of people are tipped workers.

Now how do I know gender was going to play into this?

I just, I don't know.

Something just told me.

Something told you.

It was that little voice inside somebody's head.

Yeah.

So you have the qualified tips.

They put this in place so that.

Because everybody was afraid that like big trust fund managers and hedge fund managers were going to say that all their money is tips because it's dependent their salaries, which by the way are capital gains and not.

But that's a whole nother.

We're going to get into that one of these days.

They were afraid that they were going to say they're being tipped because it's based on performance, how well an account does.

So they made sure that that's not a qualified.

So that doesn't count.

And I think that's a good thing.

I think that that was a good cage to put around that.

But the, the funny part is, so if you're this waitress that works in a little diner and you know, somebody buys lunch and they leave you a five dollar bill on the table, that's a qualified tip.

But there's more about that too.

A non qualified tip, besides being a hedge fund manager would be if you work at a place and there's a big table of 15 people and the place that you work automatically puts a 20% gratuity on that table, which is fair.

That is not a qualified tip because it's not voluntary.

Oh, wow.

So the tip has to be voluntary.

Oh, man.

So what?

Because.

But wait, there's more.

Oh no, come on now.

So mandatory service charges or automatic gratuities are not qualified tips.

So none of those count.

So if you work in a high end place and you get these big tables, that doesn't count.

Wow.

And that's where they see most of their money, in a place.

Right.

When you have a big table of people.

All right.

The other thing is, is that.

So it's just, it's sort of confusing, but.

So you have.

Your employer has to buy in.

Yeah.

And by that I mean.

And we're hoping employers have.

We have no idea at this point.

Right.

If they did not buy into that and they are not doing it, you can't even use this adjustment to income because there's no way for us to qualify.

What part of your income was specific to this?

Okay.

Okay.

So let me ask you a question because we're going to wrap up the segment now and I want to ask you one thing.

Is it a good thing, this no tax on tips, or is it a bad thing or can you even qualify it that way?

You can't qualify it that way because for some people it may be a good thing.

We don't know yet.

And for some people it may not be.

The only other thing I wanted to mention about this is that low income workers could actually lose access to other credits that are available to them because of where their income sits if they're taking away the 25,000 and let's say that's what your income was.

And now you are eligible for this $25,000 tip.

Your income is zero.

So you're not going to get earned income credit because you have no income to get credit against.

So for some people it could be a bad thing and for some it could be a good thing.

The employer buy in is a very big deal.

Yeah, you got to convince the employer that they're going to do this.

Well, I'll tell you something, Cindy, I think you're going to see a lot of people asking a lot of questions about this when you start this.

Yeah, we're not going to answer our phones anymore.

That's our answer to that question.

All right.

Well, thank you, Cindy Barone, for being here with us as this segment of our show show called Money Talks.