Qualified Tips
Tax Glossary Term
Definition
Qualified tips are tip income that meets the requirements for the new IRC Section 224 deduction created by the OBBBA (One Big Beautiful Bill Act). To qualify, tips must be received in a job where tipping is customary — think restaurant servers, bartenders, hairstylists, hotel housekeepers, rideshare drivers, and similar service occupations. The tips must be properly reported to your employer and shown on your W-2 with Code TP in Box 12. Cash tips that you report on Form 4070 also qualify, as long as the occupation meets the customary-tipping test. Tips from occupations where tipping is not customary do not qualify. The deduction is capped at $25,000 per year and is taken as an above-the-line deduction on the new Schedule 1-A, meaning you get it on top of the standard deduction. The deduction phases out for taxpayers with MAGI above $150,000 (single) or $300,000 (married filing jointly). For every dollar over the threshold, you lose 10.0% of the deduction. Importantly, the tips deduction only reduces your federal income tax; it does not reduce FICA taxes. You still owe Social Security and Medicare tax on qualified tips. The provision is effective for tax years 2025 through 2028.
Example
Annual tips reported on W-2 (Code TP): $22,000
MAGI: $130,000 (below phase-out)
Deduction: $22,000 (under $25,000 cap)
Tax savings at 22.0% bracket: $4,840