How the “no tax on tips” deduction works (2025–2028)
The One Big Beautiful Bill Act (OBBBA) created a temporary federal deduction for qualified tips. If you work in an occupation that customarily receives tips — servers, bartenders, baristas, delivery and rideshare drivers, hairstylists, hotel staff — you can deduct up to $25,000 of reported tips from your taxable income each year. It's an above-the-line deduction, so you get it whether or not you itemize.
Crucially, this is a deduction, not an exemption: it lowers the income you pay federal income tax on, so the dollars you save equal your deduction times your marginal tax rate. A tipped worker in the 12% bracket saves about $120 in tax for every $1,000 of tips deducted; in the 22% bracket, about $220.
The rules at a glance
| Rule | Detail |
|---|---|
| Maximum deduction | $25,000 of qualified tips per year (same for single & joint) |
| Phase-out start (MAGI) | $150,000 single · $300,000 married filing jointly |
| Phase-out rate | Deduction drops $100 for every $1,000 over the threshold |
| Tax years | 2025, 2026, 2027, 2028 (then expires) |
| Applies to | Federal income tax only — not Social Security or Medicare |
What counts as a “qualified tip”
Qualified tips are voluntary cash and charged tips you report to your employer (or on your return), received in a job that traditionally receives tips. Mandatory service charges (an auto-added 18% on large tables, for example) are not tips — they're treated as regular wages. You must have a valid Social Security number, and married taxpayers generally must file jointly to claim it.
Why your tips aren't fully tax-free
The headline "no tax on tips" is a simplification. Your tips are still subject to Social Security and Medicare (FICA) withholding, and many states still tax them. The OBBBA deduction removes only the federal income tax on up to $25,000 of tips. This calculator shows exactly that piece — your federal income-tax saving — so you're not left guessing at the real number.
Frequently asked questions
How much will I actually save?
Your saving is the deductible tips (up to $25,000) multiplied by your marginal federal rate. Enter your tips and wages above and the calculator computes your federal tax with and without the deduction, then shows the difference.
Does it phase out for higher earners?
Yes. Once your modified AGI passes $150,000 (single) or $300,000 (joint), the deduction shrinks by $100 for every $1,000 of income above that line, and disappears entirely well before most tipped workers are affected.
Do I still pay Social Security and Medicare on tips?
Yes — FICA (6.2% Social Security + 1.45% Medicare) still applies to your tips. The deduction only affects federal income tax. Some states tax tips too.
Is this an official IRS calculator?
No. Calcova is an independent estimator using the enacted OBBBA rules and 2026 federal brackets. It's accurate for typical wage-and-tip income but isn't tax advice — confirm your exact figures with the IRS.
Related calculator
No Tax on Overtime calculator → — the OBBBA also lets you deduct your overtime premium. Work out that saving too.