Locksmiths, tattoo artists and pedicab drivers are among those who could benefit from a new deduction this tax season that lowers the burden on workers who received tips as part of their income last year.
Eliminating taxes on tips, accomplished through the 2025 passage of the “big, beautiful bill,” allows eligible workers to deduct up to $25,000 in tips from their federal taxable income. Deductions reduce a filer’s taxable income, so the new tax break will benefit workers in industries where tipping is common.
The Tax Policy Center, a nonpartisan joint venture of the Urban Institute and Brookings Institution, estimates that those who claim the deduction will receive an average tax cut of around $1,400.
Andrew Lautz, director of tax policy for the Bipartisan Policy Center, a nonpartisan think tank, told CBS News that some tipped workers could get an even larger tax cut depending on their income.
“If someone is claiming the maximum tip deduction and they are in the top tax bracket that is eligible for that maximum tax deduction, which is the 24% bracket, they’re going to see a tax cut of up to $6,000,” he said.
Nearly a month into tax season, Americans are receiving higher refund checks compared with last year. Early data from the IRS shows the average tax refund is nearly 14.2% higher than in 2025.
Who is eligible to deduct tips from their taxes?
Workers can claim the “no tax on tips” deduction regardless of whether they claim the standard deduction or itemize.
Taxpayers with a modified adjusted gross income (MAGI) of $150,000 ($300,000 for joint filers) can claim the full deduction — up to $25,000 each year for tax years 2025 through 2028. (Your MAGI is your adjusted gross income plus tax-exempt income.)
For single filers who earn more than $150,000 and $300,000 for joint filers, the deduction phases out by 10 cents for every dollar they make over those thresholds.
The tax deduction is also limited to specific industries where tipping is common. That list (outlined in the Federal Register) includes nearly 70 different eligible occupations. The IRS says that in order to claim the deduction, a taxpayer must work in one of the occupations on the list and receive what it refers to as “qualified tips.”
Simply, qualified tips are those that customers voluntarily offer to workers. Automatic service charges, which restaurants sometimes impose on large parties, do not qualify, according to that definition.
Tips must also be paid in cash or another medium that can be exchanged for cash, such as a check. That means digital assets, like cryptocurrency, would not qualify for the new deduction. Taxpayers can visit the IRS’s website for the agency’s complete definition of “qualified tips.”
The new deduction only affects federal income taxes on tipped income. As TurboTax notes in an online explainer, “Tips are still subject to payroll taxes and may also be taxed at the state or local level.”
How do I know the amount of “qualified tips” I received?
According to the IRS, workers can see the “qualified tips” paid to them in 2025 on a Form W-2, Form 1099-NEC, Form 1099-MISC, Form 1099-K or Form 4137.
How do I claim the tips deduction?
Workers must fill out and submit a new IRS form introduced this tax season called the Schedule 1-A. Filers can also use a Schedule 1-A to claim several other new tax deductions this year for auto loan interest, overtime pay and for Americans age 65 and older.
How many people will benefit from the deduction?
The Internal Revenue Service says in an online notice that the new deduction will benefit most taxpayers who earn tips, including veterans and people working in lower-wage jobs. Around 6 million workers report tipped wages, according to the agency.
However, some experts say the tax deduction will only help a narrow slice of tipped workers. That’s in part because many lower-paid workers who get tips and claim the standard deduction already do not owe federal income taxes.
“If you’re a very low-wage earner, you’re probably not going to benefit, certainly not substantially, from this deduction,” he told CBS News.
High earners who get tips may also not benefit if their income exceeds a certain amount. The benefit fully phases out for single filers who earn more than $400,000 and for people filing jointly who earn above $550,000, according to Congress.gov.
According to the Tax Policy Center, roughly 3% of taxpayers are expected to claim the tips deduction this year.
Alain Sherter
