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For millions of American workers in service industries, tips aren’t just a bonus — they’re a major part of take-home pay. The One Big Beautiful Bill Act (OBBBA), signed in 2025, changes the math on those tips in a significant way.
The short version: eligible tipped workers can deduct up to $25,000 in qualified tip income from their federal taxable income for tax years 2025 through 2028. That’s a potential savings of thousands of dollars on your federal income tax bill.
Part of our OBBBA Tax Guide series.
The Key Numbers at a Glance
| Item | Detail |
|---|---|
| Maximum deduction | $25,000 per person per year |
| Tax years covered | 2025, 2026, 2027, 2028 |
| Income phase-out (single) | Begins at $150,000 MAGI |
| Income phase-out (joint) | Begins at $300,000 MAGI |
| Filing requirement | Must file jointly if married |
| FICA taxes | Still owed on all tips |
| Form to use | Schedule 1-A (new for 2025) |
What Qualifies as a “Tip”
This is the most important thing to understand. Only voluntary tips qualify — amounts a customer freely chooses to pay. Automatic gratuities (the 18–20% added to large party checks) do not qualify. They’re treated as wages.
To qualify, a tip must be:
- Voluntary and determined by the customer
- Reported on your W-2 (Box 7), 1099, or Form 4137
- From a job in one of the IRS’s 70+ designated tipped occupations — finalized by Treasury and the IRS in April 2026, with visual artists, floral designers, and gas pump attendants added to the preliminary list
Quick Example
Maria is a full-time waitress who earned $30,000 in hourly wages and $20,000 in voluntary tips in 2025. Her MAGI is $50,000 — well under the $150,000 phase-out.
Under the OBBBA, she deducts $20,000 from her federal taxable income. In the 22% bracket, that’s $4,400 back in her pocket when she files her 2025 return in 2026.
She still pays Social Security and Medicare on the tips — this is a federal income tax deduction only.
How to Claim It
File Schedule 1-A with your Form 1040. Your tips from W-2 Box 7 go on this form, along with any additional tips you report on Form 4137. Major tax software handles this automatically for 2025 returns.
Starting with 2026 income (filed in 2027), employers will use W-2 Box 12 code “TP” to separately identify qualified tips, making the process even cleaner.
For the full breakdown — all eligibility rules, every example, 2026 and 2027 changes, state tax guidance, and investment strategies for your savings — see our complete guide:
→ No Tax on Tips 2026–2027: Who Qualifies, Income Limits, and Real Examples
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