back to articles
New “No Tax on Tips” Rule in 2025: What You Need to Know
In 2025, a new tax law lets eligible workers deduct up to $25,000 in tips from taxable income. Learn who qualifies, limits, and key details.
account_circle
Author: Rate My Tax Accountant
calendar_month
Published: July 4, 2025
In 2025, a major change in U.S. tax law introduces a deduction for “qualified tips,” allowing many workers in tipping occupations to reduce their taxable income. Under the One Big Beautiful Bill Act, employees and self-employed individuals may deduct up to $25,000 in tips (if they meet eligibility criteria) from their federal income taxes. (Source: IRS)
- Who qualifies? Only tips received in trades or occupations that customarily receive tips (as designated by the IRS) and that are reported to the employer or on Form 4137 are eligible.
- Limits & phaseouts: The deduction is capped at $25,000 annually and phases out at higher income levels.
- Temporary window: The rule is effective for tax years 2025 through 2028 (pending further legislative changes).
Why it matters: For those in food service, hospitality, salons, and other tip-based roles, this change could lead to sizable tax savings. It also encourages improved reporting of tips and greater transparency.
Take Action:
- Ensure you report all your tips correctly (to your employer or via Form 4137).
- Track which types of tips and occupations qualify under IRS guidance.
- Consult a tax professional to see if this deduction benefits you, especially if your income may phase you out.
***Disclaimer: This article is for informational purposes and is not meant to be financial or legal advice***