No Tax on Tips (2025–2028): Who Qualifies, the Cap and How to Claim It
The new tips deduction can cut a server's federal income tax by thousands, but it's narrower than "no tax on tips" sounds. Here is who qualifies, the cap, what it doesn't cover and how to claim it.
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📐 Figures verified Sep 28, 2026 against the IRS fact sheet on the new deductions (FS-2025-03), Public Law 119-21, IRS Topic 761 on tips and Form 4137. The deduction amounts come from our figures registry. This is general information, not tax advice. How we check numbers →
For tax years 2025 through 2028, workers in jobs that customarily get tips can deduct up to $25,000 of qualified tips a year, whether or not they itemize. The cap shrinks by $100 for every $1,000 of income above $150,000 ($300,000 joint). Tips still owe Social Security, Medicare and often state tax, and married couples must file jointly.
Numbers That Matter
| Figure | Amount | Source | Verified |
|---|---|---|---|
| Maximum deduction for qualified tips | $25,000 a year, tax years 2025–2028 | IRS FS-2025-03 | Sep 28, 2026 |
| Phase-out | Reduced by $100 for each $1,000 of modified AGI over $150,000 ($300,000 joint) | IRS FS-2025-03 | Sep 28, 2026 |
| Who can claim it | Itemizers and non-itemizers; married couples must file jointly | IRS FS-2025-03 | Sep 28, 2026 |
| The law | Public Law 119-21 (2025) | GovInfo | Sep 28, 2026 |
| Tips and payroll taxes | Tips remain subject to Social Security and Medicare taxes and must be reported | IRS Topic 761 | Sep 28, 2026 |
| Unreported tips | Reported on Form 4137 to figure the payroll tax owed | IRS | Sep 28, 2026 |
Who Qualifies
- A tipped occupation: the job must be one that customarily and regularly received tips before 2025; Treasury has published the list of qualifying occupations.
- Qualified tips: voluntary cash or card tips from customers, including shared tips through a pool, reported on your W-2, a 1099 or Form 4137. Mandatory service charges don't count.
- A valid Social Security number for work, and a joint return if you're married.
- Income under the phase-out for the full amount: above $150,000 of modified AGI ($300,000 joint), the cap drops $100 per $1,000, reaching zero at $400,000 ($550,000 joint).
- Not in certain professional businesses: tips earned in a specified service trade or business, such as health, law or consulting, are excluded.
What It Doesn't Do
- It doesn't remove payroll taxes. Social Security and Medicare still apply to tips, and your employer still withholds them.
- It may not change your state taxes. States decide whether to follow the federal deduction.
- It's a deduction, not a credit. It lowers taxable income, so its value depends on your bracket; if you already owe little federal income tax, it may save little.
How to Claim It
Keep your pay stubs and year-end forms showing your tips, report any unreported tips on Form 4137, and claim the deduction on your federal return; you don't need to itemize. Because tax forms were still catching up with the new law, check whether your W-2 separately shows qualified tips, and keep your own tip records either way.
Worked Example: A Server's Return
- The deduction: a single server with $18,000 of reported tips and income well under $150,000 deducts all $18,000.
- What it saves: about $2,160 of federal income tax in the 12% bracket, or about $3,960 in the 22% bracket.
- What it doesn't: about $1,377 of Social Security and Medicare tax on those tips is still owed.
- A high earner: at $170,000 of modified AGI with $30,000 of tips, the cap falls to $23,000, so $7,000 of tips stays taxable.
Savings use a single marginal rate for simplicity; your actual savings depend on your full return.
Decision Rules
If this, then that
- If you earn tips in a customarily tipped job → claim the deduction for 2025 through 2028, itemizing or not.
- If some tips went unreported → report them on Form 4137; only reported tips qualify.
- If you're married → file jointly to claim it.
- If your income is near $150,000 → estimate your reduced cap before counting on the full amount.
- If you work in health, law or consulting → check whether the professional-business exclusion applies.
Mistakes to avoid
- Assuming tips are now tax-free across the board; payroll and state taxes may still apply.
- Counting mandatory service charges as tips.
- Skipping the deduction because you take the standard deduction.
- Filing separately when married.
- Not keeping your own tip records.
Related: no tax on overtime covers the companion deduction; the car-loan interest deduction covers another new write-off; 2026 tax changes lists everything new; and side-hustle taxes covers self-employment income.