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During the recent Presidential election, both candidates supported the concept of removing taxes on tips. The One Big Beautiful Bill Act signed on July 4, 2025, created a tax deduction for up to $25,000 in tips for years 2025 to 2028. To qualify, the tips must be received as part of a business in which tips are customarily given to individuals.
There is a limitation, however, on the amount of tips that qualify for the exclusion. If the taxpayer’s adjusted gross income exceeds $150,000 for a single filer, or $300,000 for joint filers, the deduction is phased out. The exclusion is reduced by $100 for every $1,000 of the excess amount. For example, a single filer with $200,000 income would have an excess amount of $50,000. In light of the excess, the individual’s deduction limit would decrease by $5,000, and the individual would be entitled to a deduction of $20,000.
The tips must be paid in cash or with a credit card and must be from a business that is deemed “qualified” by the Treasury Secretary. The Treasury Secretary will provide a list of organizations that "customarily and regularly received tips on or before December 31, 2024."
The tip deduction of $25,000 will be allowed in addition to the standard deduction. It is not necessary to itemize to qualify for the tip deduction. There will be a reporting requirement for tips. The employer will reasonably designate the amount of compensation that has been reported as tips. This information will also be reported to the Internal Revenue Service (IRS).
Editor’s Note: Cash and credit card tips are frequently received in the restaurant and hospitality industry. An estimated 40% of workers in these industries have incomes that do not require them to pay federal income tax. With the standard deduction and $25,000 tip exclusion, most workers in these industries will not pay federal tax. It is probable that many workers will attempt to classify their income as tips to benefit from the $25,000 exclusion. The Treasury Secretary is likely to be quite specific in listing the qualified positions to limit potential improper use of this deduction.
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