Tax Planning
Mastering the New Federal Deduction for Qualified Tips: What You Need to Know
The One, Big, Beautiful Bill introduces a tax deduction for ‘qualified tips’ starting in 2025. Learn who qualifies, what occupations are included, and how to properly claim this benefit.
By NomadicTax Research Team • 5-8 min read • April 27, 2026
## What’s the New Qualified Tips Deduction?
The One, Big, Beautiful Bill Act (OBBBA), enacted July 4, 2025, adds **Section 224** to the Internal Revenue Code. This section allows employees and self-employed individuals to deduct “qualified tips” from income for federal income tax purposes. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-18.pdf?utm_source=openai))
## Who Qualifies for Qualified Tips?
To deduct tips under Section 224, you must meet several criteria:
- You receive **cash tips**, including through checks, credit cards, debit cards, or other “mediums denominated in cash**. Foreign currency tips qualify. Digital assets do **not** count. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-18.pdf?utm_source=openai))
- Your occupation must be on the IRS’s official **List of Occupations that Customarily and Regularly Received Tips** as of December 31, 2024. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-18.pdf?utm_source=openai))
- If married, you must **file a joint return** to claim the deduction. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-18.pdf?utm_source=openai))
## How Much Can You Deduct?
- The **maximum deduction** is \$25,000 per taxable year, **regardless** of filing status. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-18.pdf?utm_source=openai))
- The deduction phases out based on your **modified adjusted gross income**:
- over \$150,000 for single filers;
- over \$300,000 for joint filers. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-18.pdf?utm_source=openai))
## Effective Date & Other Key Dates
- These final regulations go into effect **June 12, 2026**. Income reports or tips paid before then won’t trigger retroactive application. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-18.pdf?utm_source=openai))
- Applies for **taxable years beginning after December 31, 2024**. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-18.pdf?utm_source=openai))
## How to Claim: Reporting & Forms
- Tips must be reported on official **IRS statements or tax forms**, such as Form 4137 or certain Forms 1099 and similar reporting attachments. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-18.pdf?utm_source=openai))
- Forms used to report qualified tips will include new boxes/codes (e.g., Form W-2, or applicable 1099s) to identify and separate qualified tips. Although specific codes for 2026 are being phased in, expect clear instructions soon. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-18.pdf?utm_source=openai))
## Practical Examples
- **Restaurant server**: A waitress who earns \$4,000 in cash tips and \$2,000 via credit card tips will get full deduction on \$6,000, as long her occupation (e.g. “server/food server”) is listed. If she earns \$200,000 AGI filing single, deduction begins to reduce past that threshold.
- **Uber driver**: If your rides are tipped, and your reported tips are in cash or recognized mediums, and you are listed as an eligible occupation (e.g. “chauffeur or driver”), you may claim the deduction. But delivery-app workers might or might not be listed—check the IRS’s occupation list.
- Married couple where both spouses receive tips: The joint return may allow up to \$25,000 deduction total, not \$25,000 each. Filing separately eliminates eligibility.
## Action Checklist
- Check if your occupation is officially listed by IRS as eligible. If not listed, you may **not** take deduction.
- Keep tip records: cash, credit, dates, employer, forms with tip reporting (W-2, restaurateur statements, etc.)
- Track your AGI: determine if you’ll fall in or over the phase-out threshold.
- Consult with a tax professional or review IRS instructions when filing the 2026 tax return (which includes 2025 tips) to correctly apply this deduction.