What Is the ‘‘No Tax on Tips’’ Provision?
Under the One, Big, Beautiful Bill Act (OBBB Act), Section 70201 added a new Section 224 to the Internal Revenue Code. It allows a deduction for qualified tips for workers in occupations that customarily and regularly receive tips as of December 31, 2024. (irs.gov)
Who Qualifies?
Eligible workers must:
- Be in one of the occupations listed in the regulations—over 70 jobs ranging from bartenders and servers to gas pump attendants and floral designers are included. (irs.gov)
- Have tips that are reported on IRS returns or related forms. If you receive tips and don’t report them, they don’t count. (irs.gov)
- File a joint return if married—Section 224 limits deduction eligibility if you file separately. (irs.gov)
How Much Can You Deduct?
- The deduction is limited to $25,000 per tax year, regardless of filing status. (irs.gov)
- The deduction phases out based on Modified Adjusted Gross Income (MAGI); higher-income taxpayers may see smaller deductions. (irs.gov)
When Does It Apply?
- Effective for tax years beginning after December 31, 2024. (irs.gov)
- You may rely on prior proposed regulations if you consistently follow them until final regulations are published. (irs.gov)
Actionable Steps for Workers & Employers
- Track all reported tips carefully; document amounts accurately because only reported tips are eligible.
- Check your occupation code—ensure your job title matches one of the listed occupations.
- Review your filing status—marriage and filing choices affect eligibility.
- Watch income levels, especially for MAGI-based phase-outs.
- If you’re an employer or a tip-heavy industry business, educate employees about these changes and help them understand how to report correctly.
Example Scenario
Maya, a makeup artist (included under personal appearance and wellness), earned $30,000 in wages and $12,000 in tips in 2025. She reports all tip income. Her MAGI is $48,000. She files as single. She qualifies, and can deduct $12,000, since that’s under both the $25,000 cap and no phase-out applies (because her MAGI is low).
Meanwhile, Carlos, a server in a busy restaurant, earned $18,000 in tips and $40,000 wages. His MAGI is $150,000. He also files single. He qualifies for the deduction, but may see reduction depending on where his MAGI falls into phase-out thresholds under final regs.
Common Pitfalls & Misunderstandings
- Claiming unreported tips or “hidden” tips won’t work. Only reported tips count.
- Filing separately if married may disqualify you for Section 224 deductions.
- Assuming occupation qualifies—job titles vary; what matters is whether your occupation “customarily and regularly receives tips” under the final regulations.
- Not maintaining documentation of tips inconsistent with other income—bank records, employer reports, etc., may be needed.
Compliance Reminder for Tax Season
- Check your W-2, 1099, or tip reporting forms for accuracy.
- Review MAGI before filing to see how much of the deduction applies.
- If using a preparer, ask them specifically about the new tip deduction—they’ll need to apply these rules.