Tax Insights: No Tax on Tips

by | Dec 22, 2025 | Tax Tips and News

Tax Insights: No Tax on Tips

Good afternoon,

We wanted to share an important tax update that may benefit many of you who earn tips. A new rule under the One Big Beautiful Bill Act (OBBBA) allows you to deduct certain cash tips from your taxable income for tax years 2025 through 2028 — even if you don’t itemize deductions.

 

What This Means for You

You may be able to lower your taxable income by deducting up to $25,000 of qualified cash tips each year. This deduction is in addition to the standard deduction, which means potential extra tax savings.

 

How the Deduction Works

  • Maximum deduction: Up to $25,000 in qualified tips per year.

  • Income phaseout:

    • Single filers: Deduction begins to phase out if your modified adjusted gross income (MAGI) is over $150,000.

    • Married filing jointly: Phaseout begins when MAGI is over $300,000.

What Counts as a Qualified Tip?

To claim this deduction, your tips must meet the following:

  • Correctly reported to your employer using the required IRS forms.

  • Voluntary—tips must be freely given by customers (not service charges or negotiated payments).

  • Eligible job type—tips earned from certain professional roles (such as attorneys, accountants, consultants, doctors, or financial advisors) are not eligible.

Other Requirements

  • If you’re married, you must file jointly to claim the deduction.

  • You must provide a valid Social Security number.

  • No “double dipping”: You cannot claim this new deduction on tips you also use for the qualified business income (QBI) deduction.

What Hasn’t Changed

Even with this new tax break, the usual rules for tips still apply:

  • You must continue to report all cash and non-cash tips to your employer.

  • Employers will still withhold income tax, Social Security, and Medicare taxes on your reported tips.

  • Tips remain taxable income, but this temporary deduction allows part of that income to become tax-free.

 

If you have questions about whether your tips qualify, or how this affects your 2025–2028 tax filings, feel free to reach out — we are here to help.

 

Warm regards,

Randy Lauer, CPA

Stacy Prowse, Office Manager