Tax Planning
Tips Becoming Deductible: Navigating the ‘‘No Tax on Tips’’ Rules Under OBBB Act
New final regulations let eligible workers deduct qualified tips—here’s who qualifies, how to claim the deduction, and common pitfalls to avoid.
By NomadicTax Research Team • 5-8 min read • June 8, 2026
## 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](https://www.irs.gov/newsroom/treasury-irs-issue-final-regulations-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill?utm_source=openai))
## 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](https://www.irs.gov/newsroom/treasury-irs-issue-final-regulations-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill?utm_source=openai))
- 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](https://www.irs.gov/newsroom/treasury-irs-issue-final-regulations-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill?utm_source=openai))
- File a joint return if married—Section 224 limits deduction eligibility if you file separately. ([irs.gov](https://www.irs.gov/irb/2026-18_IRB?utm_source=openai))
## How Much Can You Deduct?
- The deduction is limited to **$25,000 per tax year**, regardless of filing status. ([irs.gov](https://www.irs.gov/irb/2026-18_IRB?utm_source=openai))
- The deduction phases out based on **Modified Adjusted Gross Income (MAGI)**; higher-income taxpayers may see smaller deductions. ([irs.gov](https://www.irs.gov/irb/2026-18_IRB?utm_source=openai))
## When Does It Apply?
- Effective for tax years **beginning after December 31, 2024**. ([irs.gov](https://www.irs.gov/irb/2026-18_IRB?utm_source=openai))
- You may rely on prior proposed regulations if you consistently follow them until final regulations are published. ([irs.gov](https://www.irs.gov/irb/2026-18_IRB?utm_source=openai))
## 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.