Can I claim a deduction for qualified tips on my tax return?
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Yes, for tax years 2025 through 2028, you may claim a deduction for qualified tips on your federal income tax return, subject to specific requirements and limitations.
1. Legal Basis and Deduction Amount
Under new Internal Revenue Code section 224, enacted by the One Big Beautiful Bill Act (OBBBA), individuals are allowed an above-the-line deduction for "qualified tips" received during the taxable year, up to a maximum of $25,000 per year. This deduction is available for tax years beginning after December 31, 2024, and before January 1, 2029.
2. What Are "Qualified Tips"?
- Qualified tips are defined as cash tips received by an individual in an occupation that customarily and regularly received tips as of December 31, 2024, as determined by the Secretary of the Treasury.
- The tips must be paid voluntarily, not subject to negotiation, and determined by the payor (i.e., the customer), not the employer.
- The deduction does not apply to tips received in a "specified service trade or business" as defined in IRC §199A(d)(2). For employees, if your employer is in a specified service trade or business, your tips are not eligible for this deduction.
- "Cash tips" include both cash and charged tips, as well as tips received under tip-sharing arrangements.
3. Reporting Requirements
- To claim the deduction, the tips must be included on statements furnished to you or your employer under IRC §§6041(d)(3), 6041A(e)(3), 6050W(f)(2), or 6051(a)(18), or reported by you on Form 4137 (Social Security and Medicare Tax on Unreported Tip Income) or its successor.
- You must include your Social Security number on your tax return to claim the deduction.
4. Income Limitations and Phaseout
- The maximum deduction is $25,000 per year.
- The deduction is reduced by $100 for every $1,000 (or fraction thereof) by which your modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for joint filers).
- MAGI for this purpose is your AGI increased by any amounts excluded from gross income under IRC §§911, 931, or 933 (generally, certain foreign earned income and possessions income).
5. Special Rules
- If you are married, you must file a joint return to claim the deduction.
- For self-employed individuals, the deduction for qualified tips is only allowed to the extent that your gross income from the trade or business (including the tips) exceeds the sum of other deductions allocable to that business (other than the tip deduction itself).
6. Practical Steps
- Keep accurate records of all tips received, as required by IRS rules. This includes daily logs and any employer-furnished statements.
- Report all tips to your employer as required, and include any unreported tips on your tax return using Form 4137 if necessary.
- Calculate your deduction: Add up all qualified tips received and reported, apply the $25,000 cap, and reduce the deduction if your MAGI exceeds the applicable threshold.
- Claim the deduction as an above-the-line deduction on your federal income tax return for tax years 2025 through 2028.
7. Example
If you are a restaurant server who received $28,000 in qualified tips in 2025, and your MAGI is $160,000:- The maximum deduction is $25,000.- Your MAGI exceeds the $150,000 threshold by $10,000.- The deduction is reduced by $1,000 ($100 for each $1,000 over the threshold).- Your allowable deduction is $24,000.
8. Termination
This deduction is not available for tax years beginning after December 31, 2028.
In summary: You may claim a deduction for qualified tips on your tax return for 2025–2028, up to $25,000 per year, subject to phaseout at higher incomes and other statutory requirements.
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