The latest 2025 tax legislation brings some big news for workers who earn tips: qualified tips will be tax-free for tax years 2025 through 2028. This new provision is designed to provide relief for service industry workers who rely on tips as a key part of their income. Here’s what you need to know about how it works and who qualifies.
A qualified tip is any cash tip received in an occupation where tipping is customary and regular. Think of jobs like waitstaff, bartenders, hairdressers, baristas, and other service industry roles where receiving tips is an expected part of the job.
For example, tipping your hairstylist would count, but tipping your auto mechanic, where tipping is not a standard practice, would not qualify. To ensure consistency, the Treasury Secretary has until October 2, 2025, to publish an official list of occupations that customarily receive tips.
The tip must be voluntary. It cannot be compulsory, negotiated, or built into the service fee.
The tip amount must be determined solely by the customer.
To claim the deduction, tips must be reported on official income statements such as a W-2 or 1099.
You will be able to deduct up to $25,000 from your taxable income for qualifying tips, and you don’t need to itemize your deductions to take advantage of this benefit. However, there are some important income and filing requirements to keep in mind:
Filing Status:
You must file as Single or Married Filing Jointly to claim the deduction.
Married Filing Separately filers are not eligible.
Income Limits:
Full deduction available if your Modified Adjusted Gross Income (MAGI) is $150,000 or less (or $300,000 for joint filers).
The deduction gradually phases out and disappears completely once MAGI reaches $400,000 for individuals or $550,000 for joint filers.
Since the deduction only applies to tips that are officially reported, workers and employers alike should ensure accurate recordkeeping. Properly reporting tips on your W-2 or 1099 will be essential for claiming this new benefit.
Have Questions? We’re Here to Help.
Tax laws are always evolving, and this new provision could have a meaningful impact for many workers. If you have questions about how these updates apply to you, or if you need help planning for the upcoming changes, reach out to an Alloy Silverstein professional. Our team is here to help you stay informed and prepared every step of the way.
Associate Partner
Julie has over 20 years of experience in public and private accounting, representing varied clientele including the medical, legal, and real estate industries and trusts.
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