What is the Qualified Tips Deduction?
A recent IRS proposed regulation under the One, Big, Beautiful Bill (OBBBA) allows individuals in occupations that customarily and regularly received tips (as of December 31, 2024) to deduct their qualified tips, subject to certain limits. (irs.gov)
Key Features and Limits
- The deduction applies to tips reported via statements (e.g., Form 1099-K, employer reporting) or individual reporting (e.g. Form 4137). (irs.gov)
- The deduction has a $25,000 maximum per year, irrespective of filing status. (irs.gov)
- It phases out above modified adjusted gross income (MAGI) of $150,000 for individuals and $300,000 for joint filers. (irs.gov)
- Occupations that qualify will be identified via a Treasury Tipped Occupation Code (TTOC) and SOC code system. (irs.gov)
Examples
| Scenario | Filing Status | MAGI | Tips Reported | Deduction |
|---|---|---|---|---|
| Jane, single server | Single | $80,000 | $18,000 | $18,000 deduction (below max) |
| Joe & Maria, joint filers | Married filing jointly | $320,000 | $30,000 | Deduction capped at $25,000; then phased out due to MAGI |
| Alex, individual with MAGI $160,000 | Single | $160,000 | $20,000 | Approximately $18,500 after phase out begins |
Actionable Insights
- Check your occupation classification. Are you in one of the listed occupations that “customarily and regularly” receive tips? Keep documentation.
- Track your tip reporting carefully. Whether tips are cash, via credit card, or shared tips, ensure you have evidence or statements.
- Monitor your MAGI. If you’re nearing the phase-out thresholds ($150k or $300k), strategize income timing.
- Plan ahead for 2026. Even though these proposed regs apply to years beginning after Dec 31, 2024, they need to be finalized. Keep an eye on updates. (irs.gov)
What Employers and Self-Employed Should Do
- Employers who collect tip statements or have tip sharing should prepare to provide clear statements.
- Self-employed tip earners must report tip income and maintain records and receipts.
Bottom line: This new deduction gives eligible tip employees and self-employed individuals a chance to reduce taxable income — with proactive record-keeping and awareness of income limits, this can be a meaningful tax benefit.