New deduction for qualified tips

For tax years 2025 through 2028, individuals may deduct qualified tips received in certain qualified occupations. These occupations include wait staff, bartenders, salon workers, personal trainers, gig economy workers, and others who customarily and regularly receive tips.

Tips earned are reported on Form W-2, Form 1099, or other statements provided to the individual. Tips may also be directly reported by the individual on Form 4137, Social Security and Medicare Tax on Unreported Tip Income.

Qualified tips – must be voluntary cash or charged tips received from customers or through tip sharing. NOTE – automatic gratuity amounts and service charges are not qualified tips for the purpose of this deduction.

How much may I deduct? The maximum annual deduction is $25,000. For self-employed individuals, the deduction may not exceed the individual’s net income, without regard to this deduction, from the trade or business in which the tips were earned.

The deduction does phase out for taxpayers with a modified adjusted gross income (MAGI) over $150,000 ($300,000 for joint filers).