A common sound bite is “No tax on tips.”

Is it really that black and white? Not exactly.

In the July 2025 One Big Beautiful Bill Act, eligible workers can claim a federal income tax deduction for up to $25,000 of qualified tip income per year (for tax years 2025 through 2028). It is a deduction, not an exemption. There are 70 types of jobs in six categories who qualify. See Fidelity for some specific links to who qualifies and look at the Federal Register for a full list.

For high earners [single, $150,000 income] [married $300,000 income, the deduction phases out. For low earners who don’t qualify for federal income tax, the deduction won’t help them. See Bipartisan Policy Center.

Tips are still taxable income which includes payroll taxes and any state or local taxes, if any. In addition, accurate documentation by both employee and employer are required. There are exceptions, such as a teenager who is claimed as a dependent on his/her parent’s tax return may not be eligible for the full tax deduction. Take a look path the National Taxpayer’s Union Foundation for more information.

Many people will benefit from this deduction until 2028, so that’s a good thing.