The One Big Beautiful Bill Act (Public Law 119‑21), enacted July 4, 2025, established a temporary federal income tax deduction for certain qualified tip income earned in tax years 2025 through 2028.
Media coverage has sometimes referred to this as “no tax on tips.” That description is incomplete. Tip income remains taxable and continues to be subject to Social Security and Medicare taxes. The law instead permits eligible taxpayers to deduct qualifying tip income from federal taxable income, subject to limits.
What Counts as Qualified Tip Income
Qualified tips generally include voluntary amounts paid by customers, such as:
- Cash tips
- Charged tips added by the customer
- Tips distributed through valid tip‑sharing arrangements
The following do not qualify:
- Mandatory service charges
- Automatically added gratuities
- Administrative or service fees
To claim the deduction, tips must be properly reported under existing federal rules.
Eligibility Requirements
The deduction is available only to taxpayers working in occupations that Treasury and the IRS identify as customarily and regularly receiving tips as of December 31, 2024.
The law also denies the deduction for tips earned in a Specified Service Trade or Business (SSTB), as defined under Internal Revenue Code §199A(d)(2). This limitation may affect certain self‑employed individuals and employees of SSTBs.
Married taxpayers must file jointly to claim the deduction.
Deduction Limits and Phase‑Out
Maximum annual deduction: Up to $25,000 per tax return.
The deduction begins to phase out when Modified Adjusted Gross Income exceeds $150,000 for single filers or $300,000 for married couples filing jointly.
For self‑employed individuals, the deduction generally may not exceed net income from the trade or business in which the tips were earned.
Reporting Considerations
For tax year 2025, Forms W‑2 and certain information returns will not separately identify qualified tip amounts. Taxpayers may need to rely on daily tip logs and employer reporting.
Beginning in 2026, Treasury is expected to implement separate reporting requirements. Additional guidance is forthcoming.
A Note on Guidance
This summary reflects the statute as enacted and currently understood. Treasury regulations and IRS guidance may further refine eligibility definitions and reporting requirements.
This article is provided for general informational purposes and does not constitute tax or legal advice. Individual circumstances vary.
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