How the tips deduction works
Only qualified tips — voluntary cash or card tips in an occupation on the IRS’s published list — are deductible, up to $25,000 per tax return regardless of filing status. If you’re self-employed, your deduction is also capped at your net business income. The deduction shrinks if your household income is high enough to trigger the phase-out, and disappears entirely if you’re married filing separately.
The formula
base = min(qualifiedTips, $25,000) if selfEmployed: base = min(base, netBusinessIncome) MAGI = qualifiedTips + otherHouseholdIncome threshold = $150,000 (single) or $300,000 (joint) phaseOutSteps = floor(max(0, MAGI − threshold) / $1,000) phaseOutReduction = phaseOutSteps × $100 deductibleAmount = max(0, base − phaseOutReduction)
Worked example
A single filer has $25,000 of qualified tips and a MAGI of $175,000.
- Base: $25,000 (at the cap already).
- Excess MAGI: $175,000 − $150,000 = $25,000, which is exactly 25 full $1,000 steps.
- Phase-out reduction: 25 × $100 = $2,500.
- Deductible amount: $25,000 − $2,500 = $22,500.
Frequently asked questions (FAQ)
Do I still pay Social Security and Medicare taxes on my tips?
Yes. This is a federal income tax deduction only. FICA (Social Security and Medicare) taxes still apply to all of your tip income, and your state may still tax it too — this is the most common misconception about the deduction.
Which occupations qualify?
Only tips earned in an occupation on the Treasury/IRS published list at IRS.gov/TippedOccupations qualify. This calculator does not determine whether your occupation qualifies — check the official list.
Do mandatory service charges count as tips?
No. Qualified tips are voluntary cash or card tips, including tip-sharing arrangements. Mandatory service charges added to a bill are not tips and do not qualify for this deduction.
Can my spouse and I each deduct $25,000 if we're married?
No. The $25,000 cap applies per tax return, not per person — a married couple filing jointly shares one $25,000 cap for their combined qualified tips, the same as a single filer.
Does this change my paycheck withholding?
No. This deduction is claimed when you file your tax return; it doesn't change how much tax is withheld from your paycheck during the year.
What happens after 2028?
The deduction applies to tax years 2025 through 2028 under the One Big Beautiful Bill Act. Unless Congress extends it, it is scheduled to expire after the 2028 tax year.