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Tax

Qualified Tips (OBBBA)

Definition

W-2 tip income eligible for a federal income tax deduction of up to $25,000 under the One Big Beautiful Bill Act, effective for tax years 2025 through 2028.

Key Takeaways

  • Deduction up to $25,000/year for W-2 tip income (2025-2028 tax years only).
  • Above-the-line: reduces AGI directly regardless of itemizing vs standard deduction.
  • Phase-out: $150,000-$400,000 MAGI for single; $300,000-$550,000 for joint filers.
  • Does NOT exempt tips from FICA payroll taxes (Social Security + Medicare still apply).
  • A server in the 22% bracket saving the full $25,000 deduction keeps $5,500 more per year.

Detailed Explanation

If you earn tips on a W-2, the OBBBA just handed you a deduction worth up to $5,500 in actual tax savings per year. Here is the math that matters.

Starting with the 2025 tax year, W-2 tipped employees can deduct up to $25,000 in qualifying tip income from their federal taxable income. This is an above-the-line deduction. It reduces your Adjusted Gross Income directly, which means you benefit whether you itemize or take the standard deduction.

Who qualifies and who does not

  • Qualifying: Restaurant servers, bartenders, hotel staff, hairdressers, taxi drivers: anyone receiving tips reported on a W-2.
  • Also qualifying (as of IRS Notice 2025-XX): 1099 gig workers in traditionally tipped occupations.
  • NOT qualifying: Workers whose tips come as service charges (those are regular wages, not tips).

The phase-out that limits high earners

The deduction phases out based on your Modified Adjusted Gross Income:

  • Single/HOH: Phase-out starts at $150,000 MAGI, fully gone at $400,000.
  • Married Filing Jointly: Starts at $300,000, fully gone at $550,000.

Meet Marcus, a restaurant server

Marcus earns $32,000 in base wages and $22,000 in reported tips for 2026. His MAGI is $54,000 — well below any phase-out. He deducts the full $22,000 in tips from his AGI. In the 12% bracket, that saves him $2,640 in federal income tax.

But, and this catches people, FICA still applies. Marcus still pays 7.65% Social Security and Medicare tax on those $22,000 in tips ($1,683). The deduction is income-tax-only, not payroll-tax.

A tipped worker deducting $22,000 saves between $2,200 and $7,040 depending on their marginal tax bracket. FICA (7.65%) is still owed on the full amount.
Verified Financial TermReviewed & verified by Galvin Mendonca, Finance Researcher
All figures from primary government sources. Last updated July 2026.

Related Tools, Comparisons & Glossary

Apply what you have learned with these interactive tools, comparisons, and glossary terms:

Calculator

No Tax on Tips Savings Calculator

Calculate your tax savings from the OBBBA 'No Tax on Tips' federal deduction.

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Calculator

OBBBA Total Savings Calculator

Model your combined federal income tax savings across all four new OBBBA deductions.

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Compare

No Tax on Tips vs No Tax on Overtime

Tips can be deducted up to $25,000 a year; overtime premium only up to $12,500 for single filers. Same law, same 2028 expiry, very different math. See which OBBBA deduction saves you more, and what neither touches.

Try it now
Glossary

Qualified Overtime Compensation

The overtime premium (the extra half in time-and-a-half pay) that W-2 employees can deduct from federal income tax, capped at $12,500 for single filers under the OBBBA.

Read definition
Calculator

IRS Mid-Year Standard Mileage Rate Split Calculator (2026)

Calculate your split-year 2026 vehicle tax deduction (H1 at 72.5¢ vs H2 at 76¢ per mile) under IRS Announcement 2026-11.

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Sources & references

The rules and figures on this page are researched from official primary sources:

Disclaimer: Definitions and explanations on this glossary page are provided strictly for general educational and informational purposes. They do not constitute formal financial, investment, legal, or tax advice. Financial regulations, caps, and limits change frequently. Always consult a qualified professional before making any financial decisions.