Who qualifies for the "No Tax on Tips" deduction in 2025, and how do I claim it on my federal return?

The One, Big, Beautiful Bill Act (OBBBA) introduced a new "No Tax on Tips" deduction for tax year 2025, allowing eligible tipped workers to deduct up to $25,000 of qualified cash tips from their federal taxable income. This is an above-the-line deduction, meaning you can claim it whether you take the standard deduction or itemize.

### Who Qualifies?

To be eligible for the qualified tips deduction:

• Occupation: You must work in an occupation that customarily and regularly receives tips. This typically includes workers in the hospitality, food service, beverage, and personal care industries — for example, servers, bartenders, hairstylists, estheticians, valets, and hotel concierge staff.
• Tip Reporting: The tips must have been reported to your employer (for W-2 employees) or reported by you directly (for self-employed individuals via Form 4137). The tips must appear on Form W-2, Form 1099-NEC, Form 1099-MISC, Form 1099-K, or Form 4137.
• Income Limit (Phase-Out): The deduction begins to phase out once your Modified Adjusted Gross Income (MAGI) exceeds $150,000 ($300,000 for married taxpayers filing jointly). The deduction is reduced by 30 cents for every dollar of MAGI above the threshold.

Example: If your MAGI is $160,000 and you received $25,000 in tips, your deduction is reduced by $3,000 (10,000 excess × 30%), leaving a deductible amount of $22,000.

### How to Claim It

The IRS released Schedule 1-A as a new supplemental form attached to Form 1040. You use Part I of Schedule 1-A to calculate and report your qualified tip deduction. The resulting deduction flows to Schedule 1, Line 26, and then to Form 1040, Line 10.

Key rules:

• Employer reimbursements or service charges that are paid out to employees are not qualified tips.
• The deduction applies to tips received from customers — tips set by the employer (mandatory service charges) do not qualify.
• This deduction is available for tax years 2025 through 2028 under the OBBBA.

Refer to IRS FS-2025-03 and the Form 1040 Instructions (Schedule 1-A section) for the complete list of qualifying occupations and calculation guidance.