Digital Nomad
Digital Nomads and the New No-Tax-on-Tips Provision: What You Need to Know
If you're living abroad or working internationally but still receiving tips from U.S. sources, the One, Big, Beautiful Bill’s no-tax-on-tips rules (for occupied that “customarily and regularly received tips” before Jan 1, 2025) could impact you — this article walks through what qualifies, how deductions phase out, and how to plan your tax return.
By NomadicTax Research Team • 5-8 min read • November 22, 2025
## What is the no-tax-on-tips rule?
The “no-tax-on-tips” provision was introduced in the One, Big, Beautiful Bill Act (OBBBA), effective for tax years **2025 through 2028**. Under this provision, eligible **employees or self-employed individuals** may **deduct “qualified tips”** from their gross income for federal income tax purposes. “Qualified tips” must:
- Be from occupations that **customarily and regularly received tips** on or before **December 31, 2024**; ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
- Be reported via a Form W-2, Form 1099, or Form 4137 (for unreported tips). ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
There’s also a cap of **$25,000 per year** on the deduction, regardless of filing status. A **phase-out** begins for those with modified adjusted gross income (MAGI) over $150,000 (single filers) or $300,000 (married filing jointly). ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
## Why this matters for Digital Nomads
If you're abroad but employed by a U.S. employer, or performing work remotely for U.S. clients and you receive tips, this provision could reduce your U.S. tax liability—especially if you worked in an occupation eligible under the “customarily and regularly tipped” list. Even as a nonresident alien (filing Form 1040-NR), or U.S. citizen living abroad, understanding what qualifies matters.
### Example
Sarah, a U.S. citizen living in Lisbon, works virtually for a U.S. restaurant as a consultant, but also streams games and receives tips via PayPal while participating in a tipped occupation as defined by the IRS (say, an entertainer). If she receives $8,000 in tips in 2025 and her MAGI is $120,000, she may deduct the full $8,000 as “qualified tips” provided she meets the occupation test and properly reports the income. If she had MAGI of $170,000, her deduction would be reduced due to the phase-out. ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
## Proposed rules and getting clarity
The IRS issued **proposed regulations** (Notice of Proposed Rulemaking REG-110032-25) to:
- Define “occupations that customarily and regularly received tips” before Dec 31, 2024; ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
- Specify what constitutes “cash tips” including tip-sharing arrangements and electronically settled tips; ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
- Clarify that employees in specified service trade or businesses (SSTBs) are **not eligible**, even if their occupation is on the list; ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
Comments on the proposed rules were due Oct 22, 2025. So final rules may still change. ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
## Actionable steps for Digital Nomads
1. **Track Tip Income Carefully**: Always record the amounts and the occupation in which you earned them.
2. **Check Occupation Eligibility**: When IRS publishes the official list, verify whether your occupation is included. If not, you may not qualify. ([eitc.irs.gov](https://www.eitc.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
3. **Report Properly**: Use the correct Forms (W-2, 1099, Form 4137) and include your SSN. If married filing separately, deduction isn’t available. ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
4. **Estimate Phase-Out Effects**: If your MAGI is above $150,000 (or $300,000 for joint), calculate expected reduction ahead of filing.
5. **Stay Updated**: Proposed regulations may be finalized; timing and eligible occupations may shift.
## Potential pitfalls
- Occupations mis-classified or excluded even if they seem like they “tip regularly” if they didn’t appear to do so before 2025.
- Failing to properly report tips or include SSN (or using ITIN) may disqualify the deduction.
- Phase-out could eliminate most benefit for high MAGI earners.
## Conclusion
If you’re a digital nomad who earns tips or similar income from U.S. sources and were employed in a tipped occupation before 2025, these changes could offer a valuable opportunity to reduce taxable income. By tracking income, staying aware of rule definitions, and preparing early, you can take full advantage while avoiding surprises.