The One, Big, Beautiful Bill Act (OBBBA) includes a new income tax deduction for qualified tips received by workers in eligible occupations. The latest information released by the Treasury Department and IRS offers more guidance on qualified tips and occupations that are eligible for this deduction starting with the 2025 tax year. 

The “qualified tips” deduction explanation

Many people in various careers receive tips, but not all tip income will qualify for the new deduction. Several conditions must be met for eligibility to claim the deduction.

The definition of “qualified tips”
 All qualifying amounts must be paid voluntarily by customers in a “cash or equivalent” form. That includes checks, credit or debit card payments, gift cards, and electronic transfers through payment apps. Mandatory or voluntary tip-sharing among employees is also recognized by the IRS, and these amounts qualify for deduction.

The caveat to be aware of is the difference between a voluntary tip and a mandatory service charge. If a restaurant automatically adds a “gratuity” onto large-party bills without giving the customer a choice, those amounts are considered non-tip wages or service charges and are excluded from this deduction. 

The occupation requirement
 To be eligible for this deduction, you are required to work in an occupation that customarily and regularly received tips before the end of 2024. The IRS released a list of qualifying occupations, ranging from beverage and food service staff to home service workers and more—the roles must typically depend on direct customer tipping. 

Tipped occupations have been organized into eight primary categories to give both employees and self-employed service providers clarity on whether their role meets the requirement.

• Beverage and Food Service (100s)
• Entertainment and Events (200s)
• Hospitality and Guest Services (300s)
• Home Services (400s)
• Personal Services (500s)
• Personal Appearance and Wellness (600s)
• Recreation and Instruction (700s)
• Transportation and Delivery (800s)

See the full list here: https://home.treasury.gov/system/files/136/Tipped-Occupations-Detailed-8-27-2025.pdf

The requirements and constraints

The announcement of “no tax on tips” sounds broad, but the statute and proposed regulations install specific boundaries.

$25,000 annual limit
 This maximum refers to the total amount of qualified tips you can deduct in a single tax year. No matter your filing status, you cannot exceed $25,000—only the first $25,000 in tips received can be deducted.

Phase-out based on Modified Adjusted Gross Income (MAGI)
 The deduction downsizes if your MAGI is more than $150,000 (or $300,000 for a married couple filing jointly). For every $1,000 of income above that ceiling, your deduction declines by $100.

Joint filing requirement for married taxpayers
 If you’re married, both spouses must file a joint return to claim the deduction. Otherwise, you forfeit this tax benefit. Married couples can include each spouse’s qualified tips, but together they remain bound by the same $25,000 yearly cap.

Self-employment and net income restrictions
 For self-employed individuals, tips can only be deducted if your net business income is positive. The deduction cannot be used to turn a net loss into the negative. 

SSN required
 Your Social Security Number (SSN) must be listed on your tax return to claim this deduction. Individual Taxpayer Identification Numbers (ITIN) won’t work to claim this benefit. Joint filers must list both SSN if each spouse is trying to deduct tips.

How to prepare for claiming this deduction

Final regulations could change minor details, but it’s smart to be ready before tax time arrives. Keep an accurate accounting of your income: the $25,000 tip deduction cap, along with the phase-out threshold, means that you’ll need to watch year-to-date tips and adjusted gross income. If you’re close to crossing a phase-out threshold, evaluate your work scheduling.

Maintain a daily or weekly log of tips received. You must be able to prove your tips were genuine and voluntarily paid if the IRS questions your amounts.