The sweeping tax legislation that the US federal government signed into law in July 2025 enacted many changes, including No Tax on Tips. This provision calls for some income from certain tips not to be federally taxed, though it comes with some conditions. Here's whose tips may be exempt from federal tax, and how much won't be taxed—plus details on claiming this deduction on your tax return.
What is No Tax on Tips?
No Tax on Tips is a new provision in federal law that allows for $25,000 in tipped income to be free from federal income tax if certain qualifications are met. Those criteria include working in an eligible occupation and receiving voluntary tips (meaning not those automatically added to a bill).
Did No Tax on Tips pass?
Yes, No Tax on Tips became law on July 4, 2025. It was part of larger tax legislation that included No Tax on Overtime, which also was enacted.
How does No Tax on Tips work?
No Tax on Tips works like this: If you are employed in an occupation considered eligible by the IRS and Treasury Department, you can deduct up to $25,000 in qualified, voluntary tips (those not part of a mandatory service charge) from your gross income. The deduction begins to phase out for single filers with modified adjusted gross income (MAGI) over $150,000 and, for joint filers, over $300,000. Note that married individuals must file a joint return to claim the deduction. You can claim this deduction whether you choose to itemize or claim the standard deduction. The standard deduction is $15,750 (single filer) and $31,500 (joint filers) in 2025 and $16,100 and $32,200, respectively, in 2026.
For certain workers, this deduction could add up to a lot of savings, explains Drew Bachman, director of financial solutions at Fidelity. "For example, a restaurant server in the 22% tax bracket who makes $20,000 in tips would save $4,400 in federal income taxes. That puts money back in their pocket they can then use to save for an emergency, buy essentials, pay bills or debt, or invest."
What workers are eligible to claim No Tax on Tips?
Nearly 70 types of jobs in 8 categories are eligible for the No Tax on Tips deduction, including:
- Beverage and food service (e.g. bartenders, restaurant servers, baristas)
- Entertainment and events (e.g. casino dealers, street performers, coat checkers)
- Hospitality and guest services (e.g. porters, concierges, housekeepers)
- Home services (e.g. handymen, repairers)
- Personal services (e.g. personal care aides, tutors, child care providers)
- Personal appearance and wellness (e.g. salon workers, fitness instructors)
- Recreation and instruction (e.g. music teachers, tour guides)
- Transportation and delivery (e.g. drivers, food/package delivery workers, movers)
For the preliminary list of Treasury- and IRS-approved jobs that qualify for the deduction, visit Treasury.gov. The official list will be published in the Federal Register, the daily journal of the US government, at a later date.
Occupations that don't qualify for the deduction include those in health, performing arts, and athletics. That's at least partly because those professionals are not considered to "regularly and customarily receive tips," according to the government.
When does No Tax on Tips start?
No Tax on Tips starts in tax year 2025. It will remain in effect through tax year 2028. So when you file your 2025 federal tax return in early 2026, ahead of the April 15 tax-filing deadline, you can claim the No Tax on Tips deduction if you're eligible.
Are tips taxable?
Tipped income is not federally taxable up to $25,000 if your MAGI is under the limits for your tax-filing status ($150,000 for single and $300,000 for married couples filing jointly) and your occupation is eligible for No Tax on Tips. However, you may still have to pay payroll (i.e., Social Security and Medicare) taxes and state and local taxes (SALT).
Does No Tax on Tips only apply to cash tips?
No Tax on Tips is not only for cash tips. No Tax on Tips applies to any gratuities received voluntarily, whether they're charged on a credit card, given in cash, or doled out as part of a shared tip pool.
How to claim the No Tax on Tips deduction
If you work in an eligible occupation, you can claim this deduction by taking the following steps:
Enter your total compensation, or wages plus tips, on line 1a on Form 1040
You can likely find your total compensation in Box 1 on your W-2 if you have an employer or on 1099-NEC if you're self-employed.
On Schedule 1-A ("Additional deductions"), enter the amount earned in tips in Part II
The IRS released a draft of Schedule 1-A, a new form to reflect tip deductions as well as other new allowable deductions, like certain overtime income. The maximum amount you can enter as a deduction is $25,000, even if you earned more than that in tips. Also, keep in mind that if you earned less than $25,000 in tips, you can't deduct any more than you earned. You are responsible for reporting tips to your employer, and you must report all tips over $20 per employer per month.
Enter total additional deductions on line 13b on Form 1040
As an example, let's say you earned $75,000 in total wages, $30,000 of which was from tips. You would list $75,000 as income and $25,000 (the maximum deductible amount) as a deduction. If, instead, $18,000 of your total income came from tips, you would enter $18,000 as the deduction.
Depending on other factors, since the No Tax on Tips deduction is used to calculate your AGI, this new deduction may mean you are now eligible for credits or deductions that you could not claim before (since this deduction would reduce your AGI). Alternatively, you may be able to receive greater benefits from credits/deductions you have claimed before that determine eligibility based on AGI.
Additional guidance for individual taxpayers on claiming qualified tips is forthcoming from the Treasury and IRS. Consider consulting a tax professional for your personal situation.
What is No Tax on Overtime?
A separate provision of the tax legislation permits certain single-filing taxpayers to deduct up to $12,500 in overtime pay from their federal tax return. (Eligible joint filers may deduct up to $25,000.) Like No Tax on Tips, the deduction is effective for tax years 2025 through 2028 and phases out for single-filing taxpayers with a MAGI over $150,000 and, for joint filers, over $300,000.