No Tax on Tips: How the New OBBBA Deduction Works

Quick Answer: Starting with the 2025 tax year and continuing into 2026, eligible service and hospitality workers can deduct up to $25,000 in qualified tips under the new “no tax on tips” provision from the One, Big, Beautiful Bill Act (OBBBA). A related deduction lets workers deduct up to $12,500 ($25,000 for joint filers) in qualified overtime pay. Both deductions are available whether or not you itemize, but they phase out at higher income levels.

What Is the “No Tax on Tips” Deduction?

The no tax on tips deduction is one of the headline individual tax provisions in the One, Big, Beautiful Bill Act. It allows workers in traditionally tipped occupations — servers, bartenders, delivery drivers, salon workers, and similar roles — to deduct qualified tip income from their taxable income, up to $25,000 per year.

Who Qualifies

To claim the deduction, tips generally must:

• Be voluntarily given by a customer (not a mandatory service charge)
• Come from an occupation the IRS has identified as customarily and regularly receiving tips
• Be reported to your employer and included on your W-2 or 1099

The deduction is available to both employees and certain self-employed workers, and applies whether you take the standard deduction or itemize. Like most OBBBA individual provisions, it phases out for higher earners, so workers with substantial non-tip income should check the applicable thresholds before assuming the full $25,000 applies.

The Companion “No Tax on Overtime” Deduction

Alongside tips, the same law created a deduction for qualified overtime compensation. Eligible workers can deduct up to $12,500 of overtime pay ($25,000 for married couples filing jointly). This covers the premium portion of overtime pay required under the Fair Labor Standards Act, not straight-time wages.

A Third New Deduction: Vehicle Loan Interest

The same package of changes also introduced a deduction of up to $10,000 for interest paid on qualifying passenger vehicle loans, and an additional $6,000 deduction for taxpayers age 65 and older. Taken together, these new deductions represent some of the most significant changes to individual tax filing in years.

How to Claim These Deductions

• Keep accurate records of tip income and overtime pay throughout the year — don’t rely on memory at tax time.
• Make sure your employer is reporting tips and overtime correctly on your W-2.
• Use tax preparation software that has been updated for the current tax year, since these are new line items on the return.
• If you are self-employed and receive tips, talk with a tax professional about how the deduction applies to your situation.

FAQ

Do I need to itemize to claim the no tax on tips deduction?
No. It is available to both itemizers and non-itemizers, on top of the standard deduction.

Does this deduction eliminate Social Security and Medicare tax on tips?
No. The deduction applies to federal income tax; payroll taxes (Social Security and Medicare) still apply to tip income as usual.

What if I earn more than the income phase-out threshold?
The deduction is reduced or eliminated at higher income levels. Check the official OBBBA provisions page on IRS.gov or consult a tax professional for the exact phase-out ranges.

This article is for general informational purposes only and is not personalized tax advice. Consult a qualified tax professional or IRS.gov for guidance specific to your situation.

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