How does the deduction for qualified tips ("no tax on tips") work?

Who qualifies

"Qualified tips" are cash tips received in an occupation that customarily and regularly received tips on or before December 31, 2024, as listed by the IRS (IRC §224(d)(1)). The occupation list is in Treas. Reg. §1.224-1. Cash tips include tips paid in cash or charged, and for employees, tips received through a tip-sharing arrangement (IRC §224(d)(3)).

A tip doesn't qualify unless:

• it was paid voluntarily, wasn't negotiated, and the amount was set by the customer
• the business isn't a specified service trade or business under IRC §199A(d)(2). For employees, that test looks at the employer's business.

The tips must appear on an information statement (such as Form W-2 or a Form 1099) or be reported by the taxpayer on Form 4137 (IRC §224(a)).

Limits

• $25,000 per return per year: It isn't doubled on a joint return. In the regulation's example, spouses with $15,000 and $20,000 of qualified tips deduct $25,000 in total.
• Phase-out: reduced by $100 for each $1,000 of modified AGI above $150,000 ($300,000 joint). Modified AGI is AGI plus amounts excluded under IRC §§911, 931 and 933.
• Self-employed tip earners: tips count only to the extent the business's gross income, including the tips, exceeds its other deductions (IRC §224(c)).

Example: a single server with $18,000 of qualified tips and modified AGI of $170,000 is $20,000 over the threshold. The reduction is 20 × $100 = $2,000, so the deduction is $16,000.

Other requirements

• Social Security number: the return must include the taxpayer's SSN (IRC §224(e)).
• Married taxpayers must file jointly to claim it.
• Years: no deduction for taxable years beginning after December 31, 2028 (IRC §224(h)).