Major win
No tax on tips, up to $25,000
The 2025 tax law lets workers in tipped jobs subtract up to $25,000 of tips from their federal taxable income each year from 2025 through 2028.
A tip is a thank-you meant for the person who served you, and federal income tax no longer takes a slice of it, up to $25,000 a year.
The tip jar used to have two hands in it
More than 7.5 million filers deducted their tips in the first filing season under the new law, Treasury says, with an average deduction above $7,000. The break runs through 2028; Social Security and Medicare taxes still apply.
Why you should care
If you have eaten at a diner, sat in a stylist's chair or ordered dinner through an app, you have tipped someone who counts on that money for rent. Before this law, a $20 tip was taxed like a $20 raise. Now a server in the 12% bracket who deducts $7,000 in tips keeps about $840 more of her own money each year. In a household that budgets one shift at a time, that is a light bill, a set of tires or a few weeks of groceries.
Patrick Wrona is a server in Nevada. Telling the House Ways and Means Committee what the new tip deduction would mean for him, he skipped the big numbers and went straight to his utility bill: "It's basically like my energy bills just got taken care of for the year."
For years, the tip jar on the counter had two hands in it. A customer dropped in a few dollars meant for the person who refilled the coffee, and Washington reached in for income tax before the server ever counted the night's take. The law President Trump signed on July 4, 2025, which the administration calls the Working Families Tax Cuts, pulled one of those hands out.
How the deduction works
Starting with 2025 returns, workers in jobs where tipping was customary before 2025 can subtract up to $25,000 a year in tips from their federal taxable income. The official list runs to nearly 70 occupations in eight categories, from bartenders, servers and baristas to salon workers, casino dealers, housekeepers and drivers.
You can take it whether you itemize or use the standard deduction. You need a Social Security number valid for work, married couples must file jointly, and the deduction shrinks by $100 for each $1,000 of income above $150,000, or $300,000 for couples. As written, it covers tax years 2025 through 2028, so for now it is temporary, and tipped workers should plan that way.
The first filing season showed who uses it. Treasury reports that more than 7.5 million filers claimed the deduction, the average claim topped $7,000, and 90% of those filers earned under $100,000. By the numbers, this is a tax break for working people.
The slogan does promise more than the law delivers. Tips are still subject to Social Security and Medicare taxes, and state income taxes may still apply. A worker who earned too little to owe federal income tax in the first place gains nothing from a deduction. But the payroll taxes are what build a worker's own Social Security benefit, and for the millions of tipped workers who did owe income tax, the savings are real money.
What to check next year
Starting with 2026 pay, your W-2 should show your cash tips in box 12 under code TP and your tipped-occupation code in box 14b. Check both when the form arrives. If something is missing or wrong, ask your employer to correct it before you file, and keep your own tip log either way.
The hand still in the jar belongs to Social Security and Medicare, and that money comes back to the worker someday. The income-tax hand is out, at least through 2028.
Sources and footnotes
- House Ways and Means Committee: No Tax on Tips: Real, Targeted Relief for the Working Class (April 1, 2026)
- U.S. Treasury: A Look at the First-Year Results of the Working Families Tax Cuts (July 2, 2026)
- IRS: What the "No Tax on Tips" deduction means for you (March 5, 2026)
- IRS: General Instructions for Forms W-2 and W-3 (2026)
- Fidelity: "No Tax on Tips": A new deduction explained (2026)
- TurboTax: No Tax on Tips: How It Works in the One Big Beautiful Bill (updated Aug. 3, 2026)