Three Sweeping Tax Reforms That Could Impact Your Paycheck

As Congress pushes forward with a sweeping new tax package, three key proposals are attracting significant attention: exempting overtime wages from federal income tax, removing taxes on tipped income, and raising the State and Local Tax (SALT) deduction cap. These reforms, if passed, could profoundly impact the financial outlook for millions of American workers.

No Tax on Overtime: A Win for Hourly Workers?

The "No Tax on Overtime" proposal is part of a broader Republican-led tax initiative aiming to bolster take-home pay for middle-income earners. Under this plan, overtime wages earned beyond 40 hours per week would be exempt from federal income tax—though not from payroll taxes like Social Security and Medicare.

Who Qualifies? The benefit targets workers covered by the Fair Labor Standards Act (FLSA), including hourly employees and some salaried workers earning under $160,000. High earners in executive or professional roles are excluded.

Income Phase-Out: The deduction begins to phase out for individuals earning over $100,000 and couples over $200,000, reducing by $50 for every $1,000 above these thresholds.

Projected Impact: While the change could take effect as soon as October 1, 2025, it’s projected to cost the federal government around $1.34 trillion over the next decade. And this would add to the already-existing debt crises facing the United States.

No Tax on Tips Act: Support for Service Industry Workers

The "No Tax on Tips Act" (H.R. 482/S.4621) seeks to allow workers in traditionally tipped occupations to deduct up to $25,000 in cash tips from their taxable income. These tips must be properly reported to employers and are still subject to payroll taxes.

Eligibility: The exemption applies to occupations recognized as tip-receiving as of December 31, 2023. Highly compensated individuals are excluded.

Potential Upside and Concerns: Supporters say the proposal could substantially improve take-home pay for low-to-moderate income service workers. However, critics highlight the anticipated revenue loss—estimated between $100 billion and $550 billion—and the administrative burden on employers to accurately report and track tip income.

SALT Deduction Cap Expansion: Relief for High-Tax State Residents

Also on the table is a long-debated revision of the SALT deduction cap. Currently limited to $10,000, the proposed change would raise the cap to $30,000 for married couples filing jointly and $15,000 for single filers.

These caps apply fully to joint filers earning up to $400,000 and single filers up to $200,000. Above these thresholds, the deduction phases out, disappearing entirely at $500,000.

Political Backlash and Budget Fears: Some GOP lawmakers from high-tax states argue the new caps don’t go far enough, calling for broader relief. At the same time, the projected $1.2 trillion revenue loss has fiscal conservatives sounding the alarm.

What’s Next?

These changes are part of a comprehensive tax reform bill slated for a House vote before Memorial Day. However, significant internal disagreements and the need for bipartisan Senate support make the outcome uncertain.

Conclusion

These tax reform proposals collectively aim to lighten the load for working- and middle-class Americans, particularly those earning overtime, tips, or living in states with high local income tax rates. As Congress continues negotiations, taxpayers should stay informed about how these potential laws could reshape their financial picture in 2025 and beyond.

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