Tax Planning
Maximizing Deductions with the New Qualified Tips Deduction Rule
New regulations under the “One, Big, Beautiful Bill” introduce a deduction for qualified tips—this article shows how service workers can leverage them.
By NomadicTax Research Team • 5-8 min read • November 14, 2025
## 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](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
## 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](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
- The deduction has a **$25,000 maximum** per year, irrespective of filing status. ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
- It phases out above modified adjusted gross income (MAGI) of $150,000 for individuals and $300,000 for joint filers. ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
- Occupations that qualify will be identified via a Treasury Tipped Occupation Code (TTOC) and SOC code system. ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
## 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
1. **Check your occupation classification.** Are you in one of the listed occupations that “customarily and regularly” receive tips? Keep documentation.
2. **Track your tip reporting carefully.** Whether tips are cash, via credit card, or shared tips, ensure you have evidence or statements.
3. **Monitor your MAGI.** If you’re nearing the phase-out thresholds ($150k or $300k), strategize income timing.
4. **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](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
## 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.