Overview of the deduction

• Effective 2025 through 2028, employees and self-employed individuals may deduct qualified tips they received in occupations the IRS identified as “customarily and regularly receiving tips” on or before December 31, 2024, and are reported on a Form W-2, Form 1099, another statement furnished to the individual, or on Form 4137 if the individual directly reports the tips.
• “Qualified tips” include voluntary cash or charged tips received from customers, including shared tips.
• Maximum annual deduction is $25,000.
• For self-employed individuals, deduction cannot exceed net income (before this deduction) from the trade or business where tips were earned.
• Phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

Who qualifies

Individuals who:

• Have a Social Security number (SSN)
• Claim itemized or non-itemized deductions

Who doesn’t qualify

Individuals who are:

• Self-employed in a Specified Service Trade or Business (SSTB) under Section 199A
• Employees of an employer in an SSTB

How to claim the deduction

• Include your Social Security number on the return
• File jointly if you’re married

Reporting requirements

• Employers and other payors must report certain cash tips and the occupation of the tip recipient on IRS (or SSA) information returns.
• Treasury and IRS will provide penalty relief for tax year 2025.