How the no-tax-on-tips deduction works
The One Big Beautiful Bill Act, signed July 4, 2025, created a temporary federal deduction for qualified tips for tax years 2025 through 2028:
- Maximum deduction: $25,000 per tax return (not per person).
- Phase-out: reduced by $100 per $1,000 of modified AGI above $150,000 (single/head of household) or $300,000 (married filing jointly).
- Above the line: available whether or not you itemize.
- Federal income tax only: FICA still applies, and states decide on their own whether to follow.
- Ineligible: married filing separately, and tips in "specified service" businesses such as health, law and financial services.
Example savings
Texas, standard 2026 W-4, tips claimed on Step 4(b):
| Worker | Deduction | Federal tax saved |
|---|---|---|
| Server, $22k wages + $20k tips | $20,000 | $2,270 |
| Bartender, $28k wages + $30k tips | $25,000 | $3,000 |
| Couple, $60k wages + $15k tips | $15,000 | $1,800 |
Your savings equal the deduction times your top federal bracket. Most tipped workers are in the 10% or 12% bracket, so a $20,000 deduction saves roughly $2,000–$2,400. If your income is low enough that you already owe little or no federal income tax, the deduction saves less.
Do states follow no tax on tips?
Each state decides for itself. Some, such as Georgia (up to $1,750 for 2026), have passed their own partial exemptions. Many states that start from federal taxable income will follow automatically, while others decouple. Assume your tips remain state-taxable unless your state has announced otherwise.
For the full picture, read our guide to the 2026 tips and overtime deductions.