The New Tips Deduction, Explained: Who Qualifies and How Much It Is Worth

“No tax on tips” was the campaign phrase. What Congress actually passed in the One Big Beautiful Bill Act, signed on July 4, 2025, is narrower and more useful than the slogan: a temporary deduction, under new Internal Revenue Code Section 224, that lets workers in traditionally tipped jobs deduct up to $25,000 of qualified tips from their federal taxable income. It applies for tax years 2025 through 2028, it works whether or not you itemize, and — with the IRS occupation list and reporting rules now published — it is claimable on the return you file this season. The Tax Desk breaks down exactly who qualifies and what the deduction is worth in dollars.

Key Takeaways

• Workers in IRS-listed tipped occupations can deduct up to $25,000 of qualified tips for tax years 2025–2028 — whether they itemize or take the standard deduction.
• The deduction phases out above $150,000 of modified AGI ($300,000 joint), falling by $100 for every $1,000 over the threshold.
• Only voluntary cash or charged tips reported on a W-2, a Form 1099, or Form 4137 count — mandatory service charges do not qualify.

What the deduction actually is

Despite the name, this is not an exemption and tips are not tax-free. You still receive your tips as income, your employer still reports them, and they are still subject to Social Security and Medicare payroll taxes. What Section 224 does is give you an above-the-line deduction — claimed on the new Schedule 1-A — for the qualified portion, which reduces the income the federal income tax is calculated on. Because it sits above the line, you get it on top of the standard deduction; you do not have to itemize to benefit.

Three limits define the benefit. First, the cap: $25,000 per return per year, not per person — a married couple filing jointly shares one $25,000 cap, and married taxpayers filing separately cannot claim the deduction at all. Second, the window: the deduction exists only for tax years 2025 through 2028 and then expires unless Congress extends it. Third, for self-employed workers, the deduction cannot exceed your net income from the trade or business in which the tips were earned.

Who qualifies: the occupation test

Eligibility turns on your job, not just your income. The tips must be received in an occupation that “customarily and regularly” received tips on or before December 31, 2024. The IRS has published the list at IRS.gov/TippedOccupations — more than 70 occupations in eight categories: beverage and food service, entertainment and events, hospitality and guest services, home services, personal services, personal appearance and wellness, recreation and instruction, and transportation and delivery. Servers, bartenders, barbers and hairdressers, taxi and rideshare drivers, hotel bell staff, casino dealers, golf caddies, and similar roles are in. A worker in a non-listed job who occasionally receives a gratuity is not.

Two further screens apply. The tips themselves must be qualified: paid voluntarily by the customer, in an amount the customer determines, in cash or a cash equivalent such as a card charge or tip-sharing pool distribution. A mandatory service charge or automatic gratuity added by the business is not a qualified tip — the IRS treats it as wages. And tips received in a “specified service trade or business” — the Section 199A category that includes fields such as health, law, accounting, and consulting — are excluded, with limited exceptions for employees whose employer’s business is not itself a specified service business.

The phaseout, in numbers

The full deduction is available until modified adjusted gross income passes $150,000 for single filers or $300,000 for joint filers. Above the threshold, the maximum deduction shrinks by $100 for every $1,000 — or part of $1,000 — of income over the line. A single filer with a MAGI of $170,000 is $20,000 over, so the cap falls by 20 × $100 = $2,000, to $23,000. The deduction disappears entirely at $400,000 of MAGI for single filers and $550,000 for joint filers. You also need a Social Security number valid for employment, and if you are married you must file jointly to claim it.

What it is worth: a worked example

Take a single filer working as a server in 2025: $32,000 in wages and $20,000 in reported tips, for total income of $52,000. All $20,000 of tips are qualified and below the cap, so the deduction is $20,000. After the 2025 standard deduction of $15,750 and the tips deduction, taxable income is $52,000 − $15,750 − $20,000 = $16,250. Federal income tax on that amount is $1,192.50 on the first $11,925 plus 12% of the remaining $4,325 ($519), for a total of $1,711.50.

Without the tips deduction, taxable income would be $36,250 and the tax $4,111.50. The deduction therefore saves exactly $2,400 — the $20,000 deduction multiplied by the filer’s 12% marginal rate. That is the general rule for valuing it: the deduction is worth your marginal tax rate times the amount deducted. A tipped worker in the 22% bracket deducting the full $25,000 saves $5,500; a worker whose income is already below the standard deduction saves nothing, because there is no tax left to reduce. Run your own figures with the Income Tax Estimator.

How to claim it, and what records to keep

For 2025, the deduction is claimed on Schedule 1-A, the new form the IRS created for this and the other One Big Beautiful Bill deductions. The tips you claim must be reported income: shown on your Form W-2, on a Form 1099, on another statement furnished to you, or reported by you directly on Form 4137 for tips your employer did not record. Unreported tips cannot be deducted — and claiming them on Form 4137 means reporting them as income first, which is the correct and required sequence.

Keep the paper trail that connects the deduction to the income: your W-2 and pay stubs showing reported tips, your employer’s tip reports if you receive them, and a contemporaneous tip log — the IRS has long recommended a daily record, and it is the strongest evidence if a return is questioned. Because the revised information-reporting forms were not in use for 2025, IRS Notice 2025-69 allows taxpayers to substantiate the 2025 amount using employer statements, point-of-sale records, and other reasonable documentation. From 2026, employers are expected to report qualified tips and the recipient’s occupation more explicitly, which should make the claim mechanical.

One planning note before the window closes in 2028: the deduction rewards reported tips. Workers who have historically under-reported cash tips face a trade-off — reporting raises payroll tax today but builds Social Security earnings and now unlocks an income-tax deduction. For most full-time tipped workers, the combined value favors reporting in full. The Tax Desk is tracking the remaining IRS guidance on this deduction as it lands.

Educational coverage — not tax advice.