For 2025 through 2028, workers in occupations that customarily received tips before 2025 can deduct up to $25,000 of qualified tips on Schedule 1-A, whether or not they itemize. The cap shrinks by $100 for every $1,000 of modified AGI above $150,000 ($300,000 married filing jointly). You need a valid SSN and, if married, must file jointly. Tips are still subject to Social Security, Medicare and most state income taxes.
Who qualifies
- Qualified tips are voluntary cash or charged tips from customers, including amounts received through a tip pool. Mandatory service charges added to the bill don’t count.
- Your job must be on the Treasury’s list of occupations that customarily and regularly received tips on or before December 31, 2024 — servers, bartenders, hairstylists, delivery drivers, casino dealers, valets and dozens more. The 2026 W-2 shows the occupation code in Box 14b.
- Employees report tips to their employer as usual; the 2026 W-2 shows qualified tips in Box 12, code TP. Self-employed tip earners can deduct tips up to their net business income, but not if the business is a “specified service trade or business” (for example health, law, performing arts).
- You need a Social Security number valid for work, and married couples must file jointly. A couple shares one $25,000 cap.
Example: Maya, server, $38,000 including $16,000 of tips
Maya is single and her W-2 shows $38,000 of wages, of which $16,000 is qualified tips (code TP). Her W-4 has only “Single” checked, so payroll withheld $2,380 of federal income tax — the right amount if there were no tip deduction.
On her 2026 return, the tips deduction drops her taxable income from $21,900 to $5,900. Tax falls from $2,380 to $590, so her refund is about $1,790 instead of roughly zero. Her Social Security and Medicare (7.65% of all $38,000) don’t change.
Notice the deduction is worth less than “no tax” would suggest: at a 10–12% bracket, $16,000 of tips saves $1,790, not $16,000. And because it doesn’t lower AGI, it won’t make anyone newly eligible for the EITC.
Couples and higher earners: how the phase-out works
A bartender couple with one child, $96,000 of combined wages and $31,000 of tips, can only deduct $25,000 between them. Their refund comes out around $5,200 versus $2,200 without the deduction (both include the $2,200 child credit).
A single high earner with $180,000 of MAGI and $25,000 of tips sees the cap reduced by 10% of the $30,000 excess: $25,000 − $3,000 = $22,000 deductible.
Should you change your W-4?
The 2026 Form W-4 has a line in the Step 4(b) deductions worksheet for expected qualified tips. Entering, say, $12,000 there would cut withholding by roughly $1,440 a year at a 12% bracket — about $55 more per biweekly check. If you prefer a spring lump sum, leave it blank and claim the deduction on your return. Tip income is irregular, so estimate conservatively. See how to adjust your W-4.
How much is your tips deduction worth?Enter your wages, withholding, kids and any tips or overtime — the estimator applies every rule on this page.
Frequently asked questions
How does no tax on tips work?
It’s a federal income tax deduction of up to $25,000 of qualified tips per return for 2025–2028, claimed on Schedule 1-A. Tips are still included in wages and still subject to Social Security and Medicare tax.
Do I have to itemize to deduct tips?
No. The tips deduction is available whether you take the standard deduction or itemize.
What is the income limit for no tax on tips?
The $25,000 cap is reduced by $100 for each $1,000 of modified AGI over $150,000, or $300,000 for married couples filing jointly.
Where are tips shown on the 2026 W-2?
Qualified tips appear in Box 12 with code TP, and the Treasury tipped-occupation code goes in Box 14b.
Does no tax on tips apply to state taxes?
Only if your state adopts it. The federal deduction doesn’t automatically change state income tax; several states follow federal rules and others don’t.
Related tax refund guides
- No tax on overtime explained (2026)Only the “half” counts — up to $12,500 / $25,000.
- How to adjust your W-4 for 2026Bigger paycheck or bigger refund — step by step.
- The $6,000 senior deduction for 2026Age 65+ bonus deduction, phase-out and refund impact.
- When will I get my tax refund in 2027?21-day e-file rule, PATH Act hold for EITC/ACTC, and a date chart.
- Where’s My Refund? Tracking your 2027 refundWhat the three status bars mean and when to worry.
- Tax filing deadline 2027: April 15Key dates, extensions and what being late really costs.
- Why is my tax refund smaller this year?Eight common reasons, each with a dollar example.
- Tax refund on a $40,000 salaryWorked example by filing status
Sources & method
- IRS Fact Sheet FS-2025-03, “Tax deductions for working Americans and seniors” (Jul 14, 2025; updated Jul 25, 2025): tips, overtime, senior and car-loan-interest deductions, 2025–2028.
- Public Law 119-21 (One Big Beautiful Bill Act, signed Jul 4, 2025), IRC §§224, 225, 151(d)(5)(C), 163(h)(4) — phase-out rates.
- IRS Form W-2 (2026) final instructions: Box 12 code TP (qualified tips), TT (qualified overtime), Box 14b tipped occupation code (HRMorning, Feb 2026).
- IRS Rev. Proc. 2025-32 (Oct 9, 2025): 2026 tax brackets, standard deduction ($16,100 / $32,200 / $24,150), additional 65+ amounts, EITC table, CTC $2,200 — as summarized by KPMG TaxNewsFlash and Current Federal Tax Developments (Oct 2025).
- IRS Publication 15-T (2026), Federal Income Tax Withholding Methods — Annual Percentage Method, STANDARD schedules (updated for P.L. 119-21).
- Our refund model: one W-2 job, wages only, federal income tax only (Social Security and Medicare are never refunded), Form W-4 filled out with just the filing-status box (Pub 15-T standard tables), no pre-tax 401(k). These are estimates, not tax advice — your Form 1040 decides the real number. Parameters checked 2026-11-03.