No Tax on Tips 2025: Complete Guide to the OBBBA Tip Income Tax Deduction

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduced one of the most significant tax breaks for service industry workers in decades: the "No Tax on Tips" provision. This comprehensive guide explains everything you need to know about claiming up to $25,000 in tip income tax deductions for tax years 2025 through 2028.

1. What Is the No Tax on Tips Provision?

The No Tax on Tips provision, officially part of H.R.1 (One Big Beautiful Bill Act), creates a new above-the-line federal income tax deduction for qualified tip income. Here's what makes it significant:

• Maximum Deduction: Up to $25,000 per year in tip income can be deducted
• Above-the-Line: You don't need to itemize — this reduces your Adjusted Gross Income (AGI) directly
• Effective Period: Tax years 2025, 2026, 2027, and 2028 (retroactive to January 1, 2025)
• Federal Tax Only: This deduction applies to federal income tax; tips remain subject to Social Security, Medicare (FICA), and state/local taxes

This means a server earning $25,000 in tips who is in the 22% tax bracket could save approximately $5,500 in federal income taxes each year.

2. Who Qualifies for the Tips Tax Deduction?

To qualify for the No Tax on Tips deduction, you must meet all of the following requirements:

Basic Eligibility Requirements

1. Work in a Qualifying Occupation: Your job must be in an occupation that customarily and regularly received tips before 2025. The Treasury Department has published a list of 68+ eligible occupations.
2. Receive Discretionary Tips: Tips must be voluntary payments from customers, not mandatory service charges added by the employer.
3. Have a Valid Social Security Number: You must have a valid SSN to claim this deduction.
4. Meet Income Limits: Your Modified Adjusted Gross Income (MAGI) must be below certain thresholds (see Section 4).

What Doesn't Qualify

• Mandatory service charges or auto-gratuities (these are considered wages)
• Tips received in occupations that didn't customarily receive tips before 2025
• Workers whose employer is classified as a Specified Service Trade or Business (SSTB) in certain cases
• Tips not properly reported on W-2, 1099, or Form 4137

3. Complete List of Eligible Occupations

The IRS and Treasury Department have identified the following occupation categories as eligible for the No Tax on Tips deduction:

Food Service Industry

• Servers / Waitstaff
• Bartenders
• Baristas
• Food Delivery Drivers
• Bussers
• Hosts / Hostesses
• Cooks
• Banquet Servers
• Room Service Attendants
• Counter Attendants
• Caterers
• Food Truck Operators

Hospitality & Lodging

• Hotel Bellhops
• Concierges
• Valets
• Doormen
• Housekeeping Staff
• Hotel Porters
• Spa Attendants
• Resort Staff

Personal Services & Beauty

• Hairstylists
• Barbers
• Nail Technicians
• Massage Therapists
• Estheticians
• Makeup Artists
• Tattoo Artists
• Personal Trainers

Transportation

• Taxi Drivers
• Rideshare Drivers (Uber, Lyft)
• Limousine Drivers
• Shuttle Drivers
• Airport Skycaps
• Parking Attendants
• Tour Bus Drivers

Entertainment & Gaming

• Casino Dealers
• Slot Attendants
• DJs
• Musicians
• Golf Caddies
• Performers

4. Income Limits and Phase-Outs

The No Tax on Tips deduction has income-based limitations. Your deduction may be reduced or eliminated if your income exceeds certain thresholds:

How the Phase-Out Works

For every $1,000 your MAGI exceeds the threshold, your maximum deduction is reduced by approximately $100 (6% phase-out rate). For example:

• Single filer with $160,000 MAGI: Deduction reduced by $600 (10 × $100 = $1,000 reduction in max deduction)
• Single filer with $175,000 MAGI: Deduction reduced by $1,500
• Once MAGI reaches approximately $566,667, the deduction is fully phased out

5. How to Calculate Your Deduction

Calculating your No Tax on Tips deduction involves a few steps:

Step 1: Add Up Your Qualified Tips

Include all tips reported on:

• Form W-2, Box 7 (tips from employer)
• Form 1099 (if self-employed)
• Form 4137 (unreported tips you're reporting to IRS)

Step 2: Apply the $25,000 Maximum

Your deduction cannot exceed $25,000, regardless of how much you earned in tips.

Step 3: Apply Income Phase-Out (if applicable)

If your MAGI exceeds the threshold for your filing status, reduce the maximum accordingly.

Step 4: Calculate Tax Savings

Multiply your deduction by your marginal tax rate to estimate savings.

6. How to Claim the Deduction on Your Tax Return

When you file your 2025 federal tax return (in early 2026), you'll claim the No Tax on Tips deduction as follows:

1. Gather Documentation: Collect all W-2s, 1099s, and tip records showing your qualified tip income.
2. Complete Schedule 1: The deduction will be claimed on Schedule 1 (Form 1040), Part II, as an adjustment to income.
3. Enter on Form 1040: The total flows to Form 1040 as an above-the-line deduction, reducing your AGI.
4. Keep Records: Retain tip logs, W-2s, and any documentation proving your occupation eligibility for at least 3 years.

7. Self-Employed Workers and Gig Economy

If you're self-employed or work in the gig economy, special rules apply:

Rideshare and Delivery Drivers

Uber, Lyft, DoorDash, and similar platform workers can claim the deduction on tips received through the app. Your maximum deduction is limited to your net self-employment income from that activity.

Freelance Service Providers

Hairstylists, personal trainers, and other independent contractors can deduct tips, subject to the net income limitation.

Important Note on FICA Taxes

Self-employed individuals must still pay self-employment tax (Social Security and Medicare) on tip income. The No Tax on Tips deduction only applies to federal income tax.

8. Frequently Asked Questions