2026 No Tax on Tips Deduction

Under the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, a new federal income tax deduction for tips is effective for tax years 2025 through 2028.

Key Features of the 2026 Deduction

• Maximum Deduction: Eligible workers can deduct up to $25,000 of “qualified tips” from their federal income tax annually.
• Income Phase-out: The deduction begins to phase out for taxpayers with a modified adjusted gross income (MAGI) over $150,000 (or $300,000 for joint filers). The deduction is reduced by $100 for every $1,000 of MAGI above these limits.
• Deduction Type: It is an above-the-line deduction, meaning it is available to all eligible taxpayers regardless of whether they itemize or take the standard deduction.
• Taxes Still Owed: The deduction only applies to federal income tax. Tips remain subject to Social Security, Medicare (payroll taxes), and state/local income taxes.

Eligibility Requirements

• Qualified Occupations: You must work in a job that “customarily and regularly” receives tips as of December 31, 2024. The IRS has identified nearly 70 qualifying occupations across eight industries, including:
• Food & Beverage: Waitstaff, bartenders, baristas, and kitchen staff who share in tip pools.
• Transportation: Rideshare and taxi drivers, valet attendants, and delivery people.
• Personal Services: Barbers, hairstylists, nail technicians, and massage therapists.
• Other: Gambling dealers, musicians, dancers, tour guides, and digital content creators.
• What are “Qualified Tips”? Tips must be voluntary cash or electronic payments from customers. Mandatory service charges or automatic gratuities (e.g., for large groups) generally do not qualify.

2026 Filing Instructions

Substantiation: If your 2026 W-2 does not explicitly list your tips, you may determine your deduction using your total Social Security tips (Box 7 of Form W-2), your internal tip reports (Form 4070), or daily tip logs.

Reporting: Employers are encouraged—but not required for 2026—to provide separate accountings of tips or use Box 14 of the W-2 for this information.

Specific Forms: The IRS has released a draft Schedule 1-A for claiming this and other new deductions when filing 2026 returns in early 2027.