Eligible employees and self-employed workers may deduct qualifying voluntary tips from federal taxable income for tax years 2025–28, with a $25,000 maximum per return before phase-out. The occupation must be one customarily receiving tips under IRS final regulations, and tips must be properly reported on Form W-2, eligible Form 1099/other statement or Form 4137 as appropriate. A required service charge is not a voluntary tip.
This deduction does not lower AGI
The deduction is figured on Schedule 1-A and flows to Form 1040 after adjusted gross income is calculated.
Marcus's tip amount
Marcus has $22,000 of properly reported voluntary tips in a qualifying restaurant occupation and otherwise meets the conditions, with MAGI below $150,000. His potential tip deduction is $22,000, not a guaranteed $2,640 tax refund. The real federal income-tax change depends on other wages, filing status, standard/itemised deduction, credits and which brackets the deduction crosses. Social Security/Medicare or self-employment taxes generally still apply to tips under their separate rules.
Income phase-out and self-employment
The reduction begins when MAGI exceeds $150,000, or $300,000 for married joint filers. Under IRS rules, $100 of deduction is removed for each $1,000 of excess MAGI, after the $25,000 ceiling. A self-employed claimant's deduction cannot exceed net income from the business where the tips arose and specified-service-business exclusions may apply. Married taxpayers must file jointly and a valid SSN is required.
