Higher Refunds With No Tax on Tips Deduction For 2025 to 2028 – What to Expect

For millions of Americans in service industries, tips are more than just extra cash – they’re a significant portion of their livelihood. If you’re a waiter, bartender, salon technician, or even a rideshare driver, get ready to celebrate!

President Trump’s recently enacted “One Big Beautiful Bill Act” (OBBBA) introduces a groundbreaking federal income tax deduction for qualified tips, directly putting more money back into your pocket.

This isn’t just a fleeting benefit; it’s a dedicated tax break, effective for tax years 2025 through 2028.

Here’s everything you need to know about the “No Tax on Tips” provision, how it works, who stands to gain, and crucial details on how to claim this exciting new deduction.

What Exactly is “No Tax on Tips”?

In essence, the “No Tax on Tips” provision allows eligible individuals to deduct a significant portion of their reported tip income from their federal taxable income.

Previously, all tips were considered taxable income. This new deduction aims to provide substantial relief to hardworking tipped employees and self-employed individuals.

Key Details of the Deduction:

• Federal Income Tax Only: It’s vital to understand that this deduction applies only to federal income tax. You will still be responsible for Social Security and Medicare (FICA) taxes on your tips, as well as any applicable state and local taxes.

• Up to $25,000 Deduction: Eligible individuals can deduct up to $25,000 in qualified tips per year. This is a per-individual limit, meaning a married couple filing jointly could potentially deduct up to $50,000.

• “Above-the-Line” Deduction: This is a major perk! The “No Tax on Tips” deduction is an “above-the-line” deduction, meaning you can claim it even if you take the standard deduction. You don’t need to itemize to benefit.

• Phased-Out for Higher Earners: To ensure the benefit targets those who need it most, the deduction begins to phase out for taxpayers with a modified adjusted gross income (MAGI) exceeding $150,000 ($300,000 for married couples filing jointly). For every $1,000 your MAGI goes over this threshold, the deduction is reduced by $100.

• Temporary Provision: Currently, this deduction is in effect for tax years 2025 through 2028.

Who Benefits from the “No Tax on Tips” Deduction? Some Examples

This deduction is designed to provide significant financial relief to individuals who “customarily and regularly received tips” on or before December 31, 2024.

The IRS is mandated to publish a definitive list of these qualifying occupations by October 2, 2025 (and I will update this post with any changes then). However, based on the spirit of the law and common practice, here are some examples of who stands to benefit:

1. Restaurant Servers & Bartenders: This is perhaps the most obvious beneficiary. Servers and bartenders often rely heavily on tips for their income.
   • Example: Sarah, a full-time waitress, earns an average of $30,000 annually in tips. Under the new law, she can deduct up to $25,000 of that from her federal taxable income, leading to hundreds, potentially thousands, in tax savings. This could mean more money for rent, groceries, or even a much-needed vacation.
2. Hair Stylists, Barbers & Salon Technicians: The OBBBA specifically expands the employer FICA tip credit to include beauty service businesses where tipping is customary, indicating these professionals are squarely in line for the individual deduction as well.
   • Example: Mark, a self-employed barber, typically earns about $28,000 a year in tips from his loyal clientele. He can now deduct a substantial portion of this, which might allow him to upgrade his equipment or invest in further training to expand his services.
3. Rideshare & Food Delivery Drivers: In the gig economy, tips are paramount for drivers. As long as these are reported, they stand to gain significantly.
   • Example: Jessica, a rideshare driver, logs many hours and earns around $22,000 in tips annually. This deduction means a larger percentage of her hard-earned tips will stay in her pocket, making her side hustle even more profitable and helping her meet her financial goals.
4. Hotel Bellhops & Concierges: These roles are inherently tied to tips for quality service.
   • Example: David, a seasoned hotel bellhop, regularly receives tips for assisting guests with their luggage. If his reported tips amount to $18,000 for the year, he can deduct this entire amount from his federal income tax, a welcome boost to his overall earnings.
5. Casino Dealers: Professionals in the gaming industry often depend on tips as a core component of their compensation.
   • Example: Emily, a blackjack dealer at a local casino, consistently receives tips from players. Assuming her reported tips fall within the $25,000 limit, she can significantly reduce her federal tax liability, allowing her to save more or pay down debt faster.

How to Claim the “No Tax on Tips” Deduction

Claiming this deduction will be straightforward for most eligible taxpayers, as it’s an “above-the-line” deduction. However, there are crucial steps and requirements:

1. Ensure Your Tips are Reported: This is the most critical step. For employees, your qualified tips must be reported to your employer and reflected on your Form W-2. For self-employed individuals or independent contractors, tips must be reported on a Form 1099 or other specified statement. The IRS will be updating tax forms to accommodate this new reporting.
   
2. IRS Occupations List: Keep an eye out for the IRS’s official list of occupations that “customarily and regularly” received tips on or before December 31, 2024. This list, expected by October 2, 2025, will confirm eligibility for specific roles.
   
3. Social Security Number Required: To claim the deduction, you must include the Social Security Number of the qualifying individual(s) on your tax return.
   
4. File Jointly If Married: If you are married and wish to claim the deduction, you must file a joint return.
   
5. Deduction Cap and Phase-Out: Be mindful of the $25,000 annual deduction cap per individual and the income phase-out thresholds ($150,000 for single filers, $300,000 for joint filers).

What Employers Need to Do:

Employers with tipped employees will have updated reporting requirements. They must report the total amount of cash and non-cash tips reported by an employee, along with the employee’s occupation, on the employee’s Form W-2.

For 2025, the IRS will allow employers to “approximate” qualified cash tip amounts using a “reasonable method” that the Treasury Secretary will define.

More Money in Your Pocket: The Real-World Impact

The “No Tax on Tips” deduction is more than just a line item on a tax form; it’s a direct investment in the financial well-being of millions of American workers. By reducing their federal income tax burden, this provision empowers individuals to:

• Seed an Emergency Fund: Aim for 3-6 months of essential living expenses.
• Increase Disposable Income: More take-home pay means more money for daily expenses and paying down debt.
• Boost Economic Activity: When individuals have more money, they’re more likely to spend it, stimulating local economies.
• Recognize Hard Work: This deduction acknowledges the significant contribution of tipped workers to the service industry and the broader economy.

While this deduction is temporary (2025-2028), it offers a substantial opportunity for eligible individuals to maximize their earnings.

Stay informed about the IRS guidance and update your tax planning accordingly to ensure you don’t miss out on these significant savings!