"No Tax on Tips" 2025: deduct up to $25,000 in tips

One of the most talked-about changes in the One Big Beautiful Bill Act is the deduction known as "No Tax on Tips." If you work in a job where you receive tips, this new deduction can lower your federal income tax starting with tax year 2025. Here's how it works.

How much can I deduct?

You can deduct up to $25,000 of qualified tips per year. If you received less than that, you only deduct what you actually earned in tips. It's an above-the-line deduction, which means you can take it even if you use the standard deduction — you don't have to itemize.

Who qualifies?

The deduction applies to workers in occupations that customarily and regularly receive tips (the IRS published a list of about 68 approved occupations, based on those that regularly received tips on or before December 31, 2024). Common examples: servers, bartenders, delivery drivers, rideshare drivers, salon stylists, and hotel staff.

Important: workers whose employer operates a Specified Service Trade or Business (SSTB) — such as health, law, or accounting — are excluded.

Income limits (phase-out)

The deduction begins to phase out when your MAGI exceeds:

• $150,000 for single or head of household filers.
• $300,000 for married filing jointly.

It's reduced by $100 for every $1,000 of income above the threshold, and phases out completely at $400,000 (single) or $550,000 (joint).

Important rules to know

• It applies only to tax years 2025 through 2028. No deduction after December 31, 2028.
• If you're married and file separately (Married Filing Separately), you can't claim it.
• The deduction lowers federal income tax, but NOT Social Security and Medicare (FICA) taxes — those still apply to your tips.
• Tips must be properly reported (for example, on your W-2).

How do you claim it?

You claim it on the new Schedule 1-A ("Additional Deductions"), filed with your Form 1040.

Frequently asked questions

Do I need to itemize to use it? No. It's above-the-line, so you can take it even with the standard deduction.

Do my tips become completely tax-free? Not entirely. Federal income tax is reduced, but Social Security and Medicare still apply.

Do app-based drivers qualify? Many delivery and rideshare drivers fall within the tipped occupations; check the official IRS list for your specific role.

These new rules change how returns are prepared. At Aprendiendo Taxes con Alex, we teach you to apply them correctly, with courses taught by an IRS Enrolled Agent. Explore our courses here.

General information for tax year 2025; not individual tax advice. Consult your preparer for your specific situation.