No Tax on Tips? What Service Industry Workers Need to Know (2025–2028)
If you earn income from tips, you may have heard about the new “No Tax on Tips” rule. While the name makes it sound like tips are completely tax-free, that’s not exactly the case.
However, beginning in 2025, eligible workers may be able to deduct a portion of their tip income — which could reduce taxable income and increase refunds.
Here’s what you need to know.
Are Tips Still Taxable?
Yes.
You must still report all tips as income. Social Security and Medicare (FICA) taxes will still apply. Tips are still considered taxable earnings.
The difference is that qualifying taxpayers may now be able to claim a federal income tax deduction for certain reported tip income.
This change applies to tax years 2025 through 2028.
What Is the New Tip Deduction?
Eligible taxpayers may deduct up to $25,000 of qualified tip income per tax return.
This is considered an above-the-line deduction, which means:
You don’t have to itemize to claim it
It reduces your taxable income directly
It may help increase eligibility for other income-based credits
For many workers in restaurants, hospitality, salons, rideshare, and delivery services, this could significantly lower taxable income.
Income Limits to Know
The deduction begins to phase out once your modified adjusted gross income (MAGI) exceeds:
$150,000 for Single filers
$300,000 for Married Filing Jointly
Taxpayers filing Married Filing Separately are not eligible for this deduction.
If your income is near these thresholds, proper tax planning becomes even more important.
What Counts as Qualified Tips?
To qualify:
Tips must come from jobs that traditionally and regularly receive tips
Tips must be properly reported
Cash and credit/debit card tips qualify
What does not qualify:
Automatic service charges added by the employer
Non-cash gifts or gratuities
Accurate reporting and recordkeeping remain critical.
How This Could Affect Your Refund
Because this deduction reduces taxable income, it may:
Lower your federal tax liability
Increase your refund
Reduce the amount you owe
Improve eligibility for certain tax credits
The actual benefit depends on your overall income, filing status, and total tax situation.
What Should You Do Now?
If you earn tips:
✔ Continue reporting all tip income accurately
✔ Keep detailed records
✔ Monitor your total income if you’re near phase-out limits
✔ Work with a tax professional to ensure you claim the full benefit
Tax law changes can create opportunities — but only if applied correctly.
The Bottom Line
The “No Tax on Tips” rule does not eliminate taxes on tips — but it does create a valuable deduction opportunity for qualifying workers from 2025 through 2028.
If tips are part of your income, this change could reduce your taxable income and potentially increase your refund.
At Correct Choice Tax Solutions, we stay ahead of tax law updates so you don’t have to. If you have questions about how this impacts your return, we’re here to help you make the correct choice.