The deduction for qualified tips, 2025 through 2028

How it works

The tax law signed July 4, 2025 (Public Law 119-21) created this deduction for tax years 2025 through 2028. Qualified tips are cash or charged tips a customer pays by choice, in an occupation on the Treasury list of jobs that customarily and regularly received tips on or before December 31, 2024, and reported on a wage statement, a Form 1099, or Form 4137. The deduction is capped at this year's official tips deduction cap (not yet verified here; see the official source below) per return, and on a joint return that one cap covers both spouses together. It shrinks as modified adjusted gross income rises above this year's official tips overtime phaseout single start (not yet verified here; see the official source below) for a single filer or this year's official tips overtime phaseout married start (not yet verified here; see the official source below) on a joint return. It is taken whether the filer itemizes or takes the standard deduction. The filer needs a valid Social Security number, and a married person has to file jointly to claim it. Tips earned in a specified service business, such as health, law, or financial services, do not count, and for a self employed worker the deduction cannot exceed the net profit of the business where the tips were earned. It lowers federal income tax only. Social Security and Medicare tax still apply to the tips, and each state decides for itself whether to follow the deduction.

What it gives

It is taken whether the filer itemizes or takes the standard deduction.

For a worker below the income line, every reported qualified tip up to the cap comes off taxable income.

A self employed worker in a listed occupation can claim it too, up to the net profit of the business.

What it costs, or where the catch is

It ends after the 2028 tax year unless Congress extends it.

It does not lower Social Security or Medicare tax, and tips that are never reported do not count.

A married person filing a separate return gets nothing from it, and tips in a specified service business are left out.

A worked example

Rosa waits tables and reports $18,000 of tips for the year on her wage statement, out of $46,000 of total pay. She files single, and her income sits well below the line where the deduction starts to shrink. If the cap were $25,000, all $18,000 would come off her taxable income. At a 12 percent rate, that lowers her federal income tax by $18,000 times 0.12, which is $2,160. Her Social Security and Medicare tax on the tips stays the same.

Where it goes wrong

The common miss is assuming every tip counts, when tips in a job off the Treasury list, tips never reported, and tips on a married person's separate return earn nothing.

Who confirms it for you

For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS: Tax deductions for working Americans and seniors. Every figure that changes by year in How it works comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number. Each worked example uses the figures of the year it names, or says its figures are only supposed.