When Does No Tax on Tips Start?
The IRC Section 224 tips deduction took effect January 1, 2025, and runs through December 31, 2028. For tax year 2025, transitional reporting rules applied under IRS Notice 2025-69 because employers were not yet required to use the new W-2 Box 12 Code TP. StartingTY 2026, Code TP reporting is mandatory, giving both filers and the IRS a standardized way to verify qualified tip amounts up to the $25,000 annual cap.
Effective dates
The One Big Beautiful Bill Act (OBBBA) established the tips deduction for tax years beginning on or after January 1, 2025, and before January 1, 2029. That means four full tax years are covered:
- Tax year 2025 (filed in early 2026): First year; transitional reporting
- Tax year 2026 (filed in early 2027): W-2 Code TP mandatory; full reporting infrastructure in place
- Tax year 2027 (filed in early 2028): Third year
- Tax year 2028 (filed in early 2029): Final year under current law
The deduction amount, $25,000 per taxpayer, is the same for all four years. The MAGI phase-out thresholds ($150,000 for single/HoH, $300,000 for MFJ) are also fixed and not indexed for inflation.
Retroactive for 2025
Because the OBBBA was signed into law during 2025, the tips deduction applied retroactively to income earned from January 1, 2025 onward. However, employers had no advance notice to update W-2 reporting systems. The IRS addressed this gap with Notice 2025-69, which allowed taxpayers to substantiate their qualified tips using:
- Pay stubs or payroll records showing tip income
- Employer-provided statements
- Form 4070 (Employee's Report of Tips to Employer) or equivalent logs
- Daily tip records kept by the employee
If you worked in a tipped occupation during 2025 and did not claim the deduction on your original return, you can file an amended return (Form 1040-X) to claim it. The standard three-year window for amendments applies.
What changed in 2026
Tax year 2026 is the first year with full reporting infrastructure. The main change: your employer is now required to report qualified tips using W-2 Box 12 Code TP. This means:
- Easier filing: The Code TP amount on your W-2 tells you exactly how much you can enter on Schedule 1-A, subject to the $25,000 cap and any phase-out.
- Less documentation burden: You no longer need to gather pay stubs or daily tip logs to substantiate the deduction (though keeping records is still good practice).
- IRS matching: The IRS can now cross-reference your Schedule 1-A deduction against the Code TP amount reported by your employer, reducing processing delays.
The deduction rules themselves did not change. The cap is still $25,000, the phase-out thresholds are the same, and the Married Filing Separately exclusion still applies. For the full eligibility rules, see the complete tips deduction guide.
When does it expire?
The tips deduction is scheduled to expire after tax year 2028. Any tips earned on or after January 1, 2029 will be fully subject to federal income tax, just as they were before 2025. Congress could extend or make the provision permanent through new legislation, but no such proposal has been enacted as of September 2026.
If you are working in a tipped occupation, the four-year window (2025 through 2028) is the time to take advantage of this deduction. Run the no tax on tips calculator to see your estimated savings for 2026.