Q: I work as a server and most of my income comes from tips. I’ve heard something about a new big tax deduction just for tipped workers. Could it actually lower my taxes?
A: Yes, it will definitely lower your taxes. Under the new tax law, people who traditionally receive tips can now deduct a large chunk of their tip income each year. It’ll amount to a pretty big tax cut for you.
The rules are simple. When you file your tax return next year, you’ll get to deduct up to $25,000 of your reported tip income. Oddly, married filers – even if both people earn tips – will only get to deduct up to a maximum of $25,000, not $25,000 each. It amounts to a weird marriage penalty (and likely a flaw.)
Let’s say you’re single and earn $45,000 this year with $32,000 of that coming in the form of tips. Right off the top, you’ll now get to deduct $25,000 of that tip income. Then, as usual, you’ll also get to use the standard deduction (which is now set at $15,750 for a single filer.) After these two deductions, you’ll end up paying federal tax on only about $5,000 of your total income. I estimate the new tip deduction will lower your taxes by a bit more than $2,500 in 2025. Not a small tax break.
Q: President Trump is pressuring the Federal Reserve to cut interest rates. As usual, he’s being really aggressive about it. Everything I read says it sets a bad precedent. But, does it really matter and do you think the Fed is really listening anyway?
A: I think it matters. The Fed was set up to be independent from politics. Just imagine if our politicians were in control. To win reelection, I think it’s safe to say they’d choose lower rates now even if it meant higher inflation or financial instability later.
Trump has been going after the Fed, and specifically Fed Chair, Jerome Powell, since his new term started. The pressure has been ramping up, even after the Supreme Court said he can’t just fire Powell. That is, except for “cause.”
So, now Trump is using the cost overruns on a big renovation project at the Fed as proof of Powell’s mismanagement. In addition, the Trump administration just threatened criminal charges against a Fed board member over an old mortgage application. On top of that, there was the sudden and unexplained resignation of another Fed board member earlier this summer.
But, I must say, markets haven’t reacted much to all of this. Investors must think the Fed will hold its ground. My worry is once trust in an independent Fed is damaged, it’ll be very hard to rebuild. I suppose you can add this to the list of similar worries about the slow erosion of trust in our institutions. It’s all starting to feel normal, so that might explain the market’s general calm.
