Tax On Tips
The new “No Tax on Tips” law creates a temporary federal income-tax deduction for certain qualified tips earned in tip-heavy occupations from 2025 through 2028. Workers in eligible tipped jobs can deduct up to $25,000 of reported, voluntary tips—such as cash, debit, or eligible gift-card tips—but only if they meet income limits, since the deduction phases out for higher earners. The IRS and Treasury are still finalizing regulations that define which occupations qualify, what counts as a voluntary tip, and how employers must report them, with 2025 treated as a transition year for employer compliance. Importantly, this is not a full tax exemption: workers must still pay Social Security and Medicare taxes on tips, and states may still tax them. The law is significant but limited—temporary, occupation-restricted, and complex—meaning not all tipped workers will qualify or receive the full benefit.
What is the New Tip Tax Law - No Tax on Tips
The new “No Tax on Tips” law lets certain tipped workers deduct up to $25,000 in qualified tips from their federal income taxes from 2025–2028. It only applies to voluntary, reported tips and phases out for higher earners. The IRS is still finalizing which jobs qualify, and 2025 will be a transition year. Keep in mind—you’ll still owe Social Security, Medicare, and possibly state taxes on those tips
What Counts as a Tip
What Tips Count - Not all qualify for the deduction.
It includes:
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Tips must be voluntary - automatically added charges like mandatory gratuities or service fees don't qualify.
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Tip pools can qualify if they're properly reported and meet IRS rules.
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Acceptable tip forms include cash, checks, debit card tips, and gift cards that can be redeemed for a fixed cash amount.
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Some income is not eligible, such as tips connected to undocumented services.
Who Qualifys
Who Can Claim - Requirements needed for the deduction/
Criteria:
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You earn tips and work in a job that customarily and regularly received tips as of December 31, 2024.
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Your MAGI is below the income limits, generally up to $150,000 for single filers, and $300,000 for married couples filing jointly, with the deduction phasing out above those levels.
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You include your Social Security Number on your tax return
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If you're married, you must file jointly to qualify.
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Your earnings meet the definition of "qualified tips."
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Your occupation is not listed as an excluded category under the IRS guidance.
Who it Helps
Who it Helps the Most - The biggest break for tipped workers ever.
Those it helps:
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Workers in tip-heavy jobs, like servers, bartenders, hairstylist, hotel staff, delivery workers, and others in occupations the IRS classifies as "customarily and regularly tipped.
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Employees who report their tips, since only reported, voluntary tips count towards the deduction.
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Lower- and middle-income earners, the deduction phases out for higher-income workers, making the biggest benefit available to those under the income limits.
Bottom Line
What This Means Right Now -
Key points:
The law isn't fully in force yet, in the sense that IRS rules on the matter are still being formalized.
If you're in a tipped job, you could see real tax savings, but only if you meet the "qualified" criteria.
The benefit is not universal: its limited by job type, how tips are given, and income.
This is a major change, but its not a permanent, unlimited tip tax abolishment, there are limits and conditions.