Disclaimer: Do not make tax planning or preparation decisions based on just this article. This article is for informational purposes only. The tax code and any guidance the IRS provides should be relied on for tax preparation and planning, as well as a competent tax professional who you have engaged for services. The tax code can and will change and as of July 9, 2025 the IRS has not yet published guidance or procedures for this deduction. This article does not cover all the details of this topic.

A new deduction for tax tips was recently passed into law. This is temporary, starting for tax year 2025 and going through tax year 2028. This deduction is independent of the standard deduction and itemizing, so doing either of those does not impact the ability to take the cash tips deduction.

Regardless of filing status, individuals may deduct up to $25,000 of qualifying tip income.

Qualifying tips can be made with cash, credit or debit cards AND may be received directly or through tip sharing. Qualifying tips CANNOT be required, negotiated, or be part of some policy provision. 

According to the law, “the term ‘qualified tips’ means cash tips received by an individual in an occupation which customarily and regularly received tips on or before December 31,2024.” Who gets to determine which occupations qualify? The IRS (under the Treasury Department) of course. 

Tips from Section 199A specified service trades or businesses are excluded. These are businesses where the principal asset is the reputation or skill of its employees or owners. Like mine. But I am still willing to accept tips. 

The tips do have to be reported on a tax form (like W-2, 1099, or others) and the IRS will be issuing guidance on both filing for tax year 2025 and later as likely there will be form changes. 

A social security number (SSN) is required to get this deduction. 

Self employed individuals are limited to deducting an amount no more than their associated self employment income. 

There is an income phaseout. When Modified Adjusted Gross Income (MAGI) goes over $150,000 (or $300,000 if filing a married filing joint return) the limit of the deduction starts lowering. It lowers $100 for every $1000 it goes over the $150,000 or $300,000 MAGI. 

The IRS will be issuing guidance and requirements for taking this deduction, so there could be some important requirements that come up that we are not aware of at this time.