Here’s what we know — and don’t know — about the new temporary tax deduction for tips.
This summer, the Trump administration made waves with the One Big Beautiful Bill Act, approving many changes. Before the bill’s passage, workers had to pay taxes on all their income, including tips and any other compensation. Tips are considered compensation, so the rule has always been to pay taxes on what you earn. Starting this year, employees and self-employed contractors can deduct qualified tips, as long as the IRS lists the job as one that regularly receives tips. This is only a federal rule. Depending on where you live, you might still have to pay state and local income tax on your tipped earnings.
For those who qualify, tipped workers could see roughly $1,800 in savings when they file next year. Some rules are still murky, but for the most part, it comes down to the type of job you have, your household income and your annual tip income. In September, the treasury department released a list of jobs that qualify for the new deduction. Listed jobs include charter boat workers and personal vehicle and equipment cleaners. However, yacht workers aren’t explicitly mentioned. So for now, there is some gray area.
“Qualified” tips are earnings you get in your job as a voluntary cash bonus. The maximum annual deduction is $25,000. If you’re self-employed — which means you get paid as a contractor and not as an employee — your deductions can’t be more than your net income.
This exemption is different for those with higher earnings. The deduction phases out for those with a modified adjusted gross income (MAGI) over $150,000, or $300,000 for joint filers.
It’s still early in the process, which means a lack of direction on the specifics of filing for this. The IRS will help filers and taxpayers during this transition period. Currently, you’ll declare your tips that are reported on IRS forms W-2, 1099, or 4137. You’ll need to provide statements or any other corresponding documents that show you earned cash tips, plus paperwork that shows you received those tips in your eligible occupation.
Regardless of how you file your taxes, itemized and standard filers are eligible for this. The new bill retroactively sets the new deduction to go into effect from January 1, 2025, through December 31, 2028. For tax year 2025, you’ll claim the new deduction when you file in early 2026. For each tax year after that, some workers will see the applicable tax withholding throughout the year, so they’ll see higher paychecks rather than a lump-sum payment after completing their tax returns.