QUALIFIED TIPS ARE TAX DEDUCTIBLE FROM 2025 TO 2028

For millions of workers in the service industry, tips make up a significant portion of annual income. Under the One Big Beautiful Bill Act (OBBBA), federal law now allows eligible taxpayers to deduct qualified tip income for tax years 2025 through 2028.

Eligible workers may deduct up to $25,000 per year in qualified tips, subject to income limitations and other requirements outlined below.

How the Deduction Works

Qualified tips must still be reported as income to your employer and on your federal tax return. The benefit is claimed as a separate federal income tax deduction. This deduction applies for federal income tax purposes only. Social Security and Medicare (FICA) taxes continue to apply to tip income under existing payroll tax rules.

Maximum Deduction and Income Phaseout

• The maximum deduction is $25,000 per eligible taxpayer per year.
• The deduction phases out gradually once modified adjusted gross income (MAGI) exceeds:
• $150,000 for single filers
• $300,000 for married couples filing jointly

If your income exceeds these thresholds, the allowable deduction may be reduced or eliminated.

Self-Employed Individuals

If you are self-employed and receive tips in connection with your trade or business, the deduction generally cannot exceed your net profit from the trade or business that generated the tips, determined before applying this deduction. Proper reporting of business income and expenses remains essential.

What Counts as Qualified Tips?

The deduction applies to qualified tip income, including:

• Cash tips
• Credit and debit card tips
• Digital tips received through apps or point-of-sale systems

You must continue to report tips to your employer as required by law. Employers must continue including reported tips on Form W-2.
Failure to report tip income may result in penalties.

How This May Affect Your Tax Return

Because this deduction reduces taxable income, it may affect the calculation or eligibility of certain tax benefits, including refundable credits. For example:

• Earned Income Tax Credit (EITC)
• Child Tax Credit
• Premium Tax Credit

Changes in income calculations can increase or decrease credit amounts depending on your specific situation. If your employer adjusts withholding to account for this deduction, your take-home pay during the year may increase. Changes in withholding can affect the size of your year-end refund or balance due.

State Tax Considerations

This deduction applies to federal income taxes. State income tax treatment may differ depending on whether your state conforms to this federal provision.

Liberty Tax Is Here to Help

Tax law changes can create new opportunities—but they can also introduce complexity. Our tax professionals understand how this new deduction interacts with credits, withholding, and other parts of your return. If you earn tip income, contact your local Liberty Tax office to ensure you are claiming the deduction correctly and maximizing your eligible benefits.

Disclaimer: This information is provided for general informational purposes only and does not constitute tax advice. Eligibility for the qualified tips deduction and its impact on your tax return will vary based on your individual circumstances. Consult a qualified tax professional for personalized guidance.