Summary:

 House Bill 484 (HB 484) amends the Income Tax Act to exempt income received from tips from state income tax in New Mexico. The bill allows residents who earn tips as compensation for services rendered or as part of their wages to exclude those tips from taxable income when calculating net income for state tax purposes. The exemption applies to taxable years beginning on or after January 1, 2025. 

Legislation Overview:

 House Bill 484 (HB 484) introduces a new tax exemption for income derived from tips. Under the bill, residents who receive tips as part of their compensation for services or as a component of their wages may exclude those amounts from their state taxable income. This exemption reduces the overall taxable income of workers in tipped industries, effectively eliminating the state income tax liability on tipped earnings. The bill does not differentiate between tips received directly from customers and those distributed through tip-sharing arrangements, meaning all forms of gratuities are excluded from taxation. The provisions of HB 484 apply to taxable years beginning on or after January 1, 2025.

Implications

HB 484 provides financial relief to workers in tipped industries by reducing their state income tax burden. Service industry employees, including restaurant staff, hotel workers, and other hospitality professionals, stand to benefit the most from this exemption. By excluding tips from taxable income, the bill increases disposable income for affected workers, potentially improving financial stability and increasing consumer spending.

The exemption may lead to a reduction in state income tax revenues, particularly if a significant portion of the workforce qualifies for the exclusion. The fiscal impact will depend on the number of workers who claim the exemption and the total amount of tips exempted from taxation. This revenue loss could be offset by increased consumer spending resulting from higher take-home pay for service workers.

The bill does not change federal tax obligations, meaning that tipped employees must still report and pay federal income taxes on their tips. Employers are still required to track and report tip income for federal tax and wage compliance purposes. Additionally, HB 484 does not address the treatment of tips in relation to other tax credits or deductions, which could create complexities for taxpayers and tax preparers when filing state returns.
 

Current Law:

 Under current law, tip income is subject to both federal and state income tax in New Mexico. Employees are required to report tips to their employers, and those amounts are included in taxable wages for both income tax and payroll tax purposes. Employers are responsible for withholding taxes on reported tips and ensuring compliance with minimum wage laws, including the application of tip credits where applicable.