Reduced Tax on Tips (2025–2028): How to Claim the $25,000 Deduction
If you receive tips as part of your job, you may be eligible for a new tax deduction from 2025 through 2028. The first $25,000 of qualified tips could be deductible, helping reduce your taxable income. Here’s what you need to know to make sure you don’t miss out.
Eligibility:
Received while preforming services in an occupation that regularly and customarily receives tips, such as:
Food & Beverage Service
Transportation & Delivery Services
Personal Services
“Qualified tips” include voluntary cash or charged tips from customers or through a tip pool.
Tips must be reported on W2, Form 1099, other specified statements, or on Form 4137 if reported individually.
Tips that do not Qualify:
Service charges automatically imposed by a business, such as an 18% fee for large parties in a restaurant, are not qualified tips.
If the customer cannot modify or disregard the charge, the amount distributed to employees cannot be deducted.
Max Deduction:
$25,000 per taxpayer
$0 for married filing separately
For self-employed individuals, deduction cannot exceed net income from the trade or business.
The credit phases out for those with income greater than $150,000 ($300,000 for joint filers).