What the deduction does
The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, created a federal income tax deduction of up to $25,000 per year in qualified tip income, for tax years 2025 through 2028. It is claimed above the line, so it works whether you itemize or take the standard deduction. Your savings equal your marginal tax rate times your qualified tip income, up to the cap.
Worked example
Tips: $22,000, single filer, MAGI $45,000, 22% bracket.
- Deduction: min($22,000, $25,000) = $22,000 (no phase-out at this income).
- Income tax savings: $22,000 x 22% = $4,840.
- Payroll tax still owed: $22,000 x 7.65% = $1,683 (the deduction does not touch FICA).
The MAGI phase-out
The deduction shrinks by $100 for every $1,000 of MAGI above $150,000 for single filers (phasing out completely at $400,000) or above $300,000 for joint filers (phasing out completely at $550,000). Most tipped workers earn well below these thresholds and keep the full deduction.
What counts as a qualified tip
Only voluntary cash or electronic tips from customers in occupations that customarily receive tips (the IRS has listed roughly 68 qualifying occupations across eight industries, including servers, bartenders, barbers, rideshare drivers, and casino dealers). Mandatory service charges and automatic gratuities do not count. Married couples must file jointly to claim it, and self-employed workers cannot deduct more than the net income of the tipping business.
Payroll and state taxes still apply
This is a federal income tax deduction only. Social Security (6.2%) and Medicare (1.45%) still apply to all tip income, and state income taxes are unaffected. Starting with 2026 income, employers report qualified tips in W-2 Box 12 with code TP, which makes documentation cleaner.
More 2026 tax calculators
Three more provisions from the same 2025 tax law (OBBBA) have their own calculators: the Gambling Losses Tax Calculator 2026, showing how the new 90% deduction cap creates taxable income, the Senior Bonus Deduction Calculator 2026, an extra $6,000 per person for filers 65 and older, and the Sports Betting Tax Calculator 2026, estimating state-by-state tax on sports betting winnings.
This calculator is an estimate, not tax advice. Eligibility depends on IRS occupation guidance and your filing situation; confirm with a tax professional.