Tax Planning

How to Make the Most of the “No Tax on Tips” Provision Under OBBB

This article explains the new deduction rules for tips under the One, Big, Beautiful Bill (OBBB), helping service workers understand what qualifies and how to claim it.

By NomadicTax Research Team • 5-8 min read • November 24, 2025

## Understanding the OBBB’s Tips Deduction Under the One, Big, Beautiful Bill (OBBB), **Section 224** introduces a deduction for *qualified tips* received in Tax Years **2025 through 2028**, with key rules: - Deductions are allowed up to **$25,000** per year for any eligible taxpayer. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-of-2025-provisions?utm_source=openai)) - There’s a **phase-out** for those whose *modified adjusted gross income (MAGI)* exceeds **$150,000** (single filers) or **$300,000** (married filing jointly). ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-of-2025-provisions?utm_source=openai)) - Occupation must be among those that **customarily and regularly received tips on or before Dec 31, 2024**. Proposed regulations list nearly 70 occupations (servers, bartenders, rideshare drivers, hairdressers, etc.). ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill?utm_source=openai)) - “Cash tips” include payments by cash, credit/debit card tips, gift cards, tokens or mobile payments that are exchangeable for cash, and voluntary tip share arrangements. Service charges that are mandatory aren’t qualified tips. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill?utm_source=openai)) ## Filing for Tax Year 2025 — What You Need to Know - **Forms W-2**, **1099**, Form 4137: These forms remain **unchanged** for 2025, despite new reporting rules under OBBB. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-penalty-relief-for-tax-year-2025-for-information-reporting-on-tips-and-overtime-under-the-one-big-beautiful-bill?utm_source=openai)) - **Transition relief** issued via Notice 2025-62: Employers and payors won’t yet face penalties for failing to provide separate accounting of cash tips, tip-occupations, or qualified overtime for 2025. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-penalty-relief-for-tax-year-2025-for-information-reporting-on-tips-and-overtime-under-the-one-big-beautiful-bill?utm_source=openai)) - **Example scenarios**: - *Waiter with tips reported in Box 7 only*: Uses that amount. - *Bartender with tips to employer + unreported tips*: May use employer reporting or Form 4137, plus unreported portion. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025?utm_source=openai)) - *Self-employed tour guide*: Keeps tip logs; though 1099-K may show large gross payments, documented tip portion counts. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025?utm_source=openai)) ## Actionable Steps To Claim the Deduction - Keep meticulous records: tip logs, copies of tip-share agreements and any statements or documents that show total tips you received. Most forms won’t separately identify tips for now. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025?utm_source=openai)) - Review your MAGI early in the year to anticipate phase-outs. If you expect to approach the threshold ($150,000 single / $300,000 married), consider deferring non-essential income or accelerating deductions. - Check whether your job appears on the officially proposed occupations list once finalized; some occupations are still under review. Meanwhile, pay attention to IRS proposed regulations REG-110032-25. ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai)) - When filing, use either the amount from Box 7 Form W-2 (if applicable), employer tip reporting via Forms 4070, or records from Form 4137. For self-employed, document tips diligently. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025?utm_source=openai)) ## Why It Matters For service-industry workers, this change means **real tax savings** by lowering taxable income on qualified tips up to significant limits. With thoughtful tracking and usage, a waiter, bartender, or other tipped worker claiming $20,000 in qualified tips could potentially reduce their tax liability noticeably. This provision also signals a shift toward **greater employer/workplace transparency in tip and pay practices**, so beginning now to build the habit of detailed documentation sets you up for success in future tax years.