New “No Tax on Tips” Deduction Could Cut Workers’ Federal Tax Bill by $1,400 on Average

Millions of tipped workers could see federal income tax relief on their tip earnings this tax season, thanks to a new deduction in the federal tax code. According to IRS guidance, the deduction lets eligible workers exclude some or all of their tip income from federal taxable income, potentially boosting refunds for 2025 returns filed in 2026.

The change stems from the One Big Beautiful Bill Act, signed into law in 2025, which created a new tax break for workers in occupations where tipping is customary. Under the policy, workers can deduct up to $25,000 of qualified tips each year instead of paying federal income tax on that portion of their income.

The deduction phases out for single filers with incomes above $150,000 and joint filers above $300,000, and tips remain subject to payroll taxes like Social Security and Medicare even if they qualify for the deduction.

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According to the Tax Policy Center, workers who claim the tip deduction could see an average tax cut of about $1,400, and those in higher tax brackets who take the full $25,000 deduction might reduce their federal tax bill by roughly $6,000.

Critics argue that while the deduction boosts refunds for some, it won’t help all tipped workers equally and might have limited impact for those with lower incomes or complex filing situations.

The deduction applies for tax years 2025 through 2028, meaning most filers can take advantage of it now but will need to stay aware of future changes as lawmakers review tax policy.

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