A change made by the Internal Revenue Service in its instructions for claiming the new tax deduction for tips is making it more difficult for self-employed and gig economy workers and may require their tax preparers to submit amended or superseding tax returns.
The
"You can't deduct more than $25,000 of qualified tips, regardless of your filing status," said the instructions. "If you are self-employed, your tips from your trade or business are taken into account in figuring the deduction only to the extent you had net income. Your net income is the gross income from the trade or business in which the qualified tips were received less the amount of the total deductions (other than the deduction for qualified tips) allocable to that trade or business. See Net income limitation, later. If you are married and filing a joint return, and both you and your spouse have qualified tip income, the $25,000 maximum amount of deduction limit applies to your combined qualified tip income. It is not a per spouse limit. The deduction amount (after applying the $25,000 deduction limit) is reduced if your MAGI is more than the amount shown next for your filing status."
The updated instructions include new rules for "net income" and limit the tip deduction by subtracting deductions allocable to the trade or business, including some deductions that appear outside Schedule C.
"The instructions specifically mention the deductible portion of self-employment tax, the self-employed health insurance deduction, and contributions to self-employed retirement plans — largely those Schedule 1 deductions," wrote
The instructions could pose problems for taxpayers since they contradicted some earlier guidance and arrived several weeks into tax season. Taxpayers who come to their tax preparers are already expecting to pay "no tax on tips," as President Trump has repeatedly promised, not a tax deduction with significant limitations. The latest rules may reduce their deductions and force taxpayers and preparers to file another tax return if they have already submitted one.
Tom O'Saben, director of tax content and government relations at the National Association of Tax Professionals, noted it could be a big problem for those who have already filed their taxes and will require self-employed taxpayers to maintain good documentation of their expenses.
"The horse is out of the barn," he said during a press call Tuesday. "That self-employed person, if they do have good documentation, could, in fact, take the tip deduction. For those individuals, I would find myself going back and saying, 'OK, how much time is going to be involved? And what is this deduction worth?'"
Tax preparers could submit a superseding or replacement return to the IRS saying it's supposed to replace the original return that was filed earlier in the season, depending on the timing. "If we go beyond April 15, then we have to look at amending and maybe that's a more practical approach, although amended returns can be a nightmare in processing," said O'Saben. "Anywhere from eight to 12 months has been the experience for a lot of folks. But nonetheless, I think we need to look at, if we're going to go back and revisit it, how much of a deduction are we talking about? And here's what it's worth to you. Do you want to pursue that? Taxpayers have the right to pay the least amount of tax the law allows. But does it make economic sense? It's going to be time on the part of the taxpayer and the tax professional. Will it justify that deduction? Every case is different."
