The U.S. Department of the Treasury and IRS recently released new details about President Donald Trump’s proposed “No Tax on Tips” deduction, a provision that could change how millions of service workers report and pay taxes on their income.
The proposal, part of the administration’s “big beautiful bill” signed in July, aims to reduce taxes for employees who rely on tips as a key part of their earnings.
What the Deduction Would Do
Under the proposed regulations, certain workers could deduct up to $25,000 in qualified tips each year from their taxable income between 2025 and 2028. The deduction begins to phase out for taxpayers whose modified adjusted gross income (MAGI) exceeds $150,000. Once income surpasses that level, the allowable deduction decreases gradually. The deduction applies to current-year earnings, meaning eligible workers can claim it on the same year’s tax return rather than waiting for future credits or adjustments. (CNBC)
Who Qualifies
According to the Treasury, the rule is designed for workers in occupations that “customarily and regularly receive tips.” A preliminary list released in August includes 68 occupations, such as:
- Servers and bartenders
- Baristas and coffee shop staff
- Hairstylists and nail technicians
- Bellhops, valets, and housekeepers
However, not every tipped occupation qualifies. Jobs considered “specified service trades or businesses” (SSTBs) under the tax code—such as those in health care, financial services, legal professions, or performing arts—are not eligible.
What Does Not Count as a Tip
Only voluntary payments from customers are considered qualified tips. Treasury officials clarified that automatic gratuities, such as a mandatory 18% charge for large restaurant parties, do not qualify.
This distinction matters because automatic service charges are treated as regular wages by the IRS and remain fully taxable.
Filing Rules and Limits
- The deduction is capped at $25,000 per tax return, not per person.
- Married couples filing jointly can deduct up to $25,000 combined.
- Married individuals filing separately are not eligible for the deduction.
Further IRS guidance will outline how to report and substantiate qualified tips when filing returns once the regulations are finalized.
What This Could Mean for Workers
If enacted as proposed, the “No Tax on Tips” rule could reduce the tax burden for millions of lower- and middle-income workers in hospitality and service industries. However, it will also require careful recordkeeping to distinguish between qualified and nonqualified tips.
For employers, clear communication about how tips are tracked, reported, and paid will be crucial to avoid confusion during tax season.
What Comes Next
The Treasury and IRS will accept public comments before releasing the final version of the rule. Once finalized, the deduction will apply to income earned in tax year 2025, meaning workers could first claim it when they file returns in 2026.
The proposed “No Tax on Tips” deduction could offer meaningful relief for service workers who depend on tips as part of their income. However, the rules are complex, and eligibility will depend on how the final regulations define “qualified tips.”
If you receive or report tip income, it’s important to review how this rule could affect your overall tax strategy. Our team at Gregory Ricks & Associates can help you understand the potential impact, evaluate your income mix, and stay prepared for the upcoming changes.(We do not provide legal or tax services, but can direct you to specialized professionals that do!)
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