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Humble Dollar frequently posts articles about TIPS – Treasury Inflation-Protected Securities. This post is not about inflation protected bonds.
The OBBBA includes new code 224, a deduction for tax years 2025-2028, for up to $25,000 in qualified tips received during the year for cash tips received by an individual in an occupation that customarily and regularly received tips before 2024. That code section also includes subsection 224(d)(2)(B) which provides that tips do not qualify for the deduction if they are received in the course of certain specified trades or businesses — including the fields of health, performing arts, and athletics.
The Treasury Department posted on its website in early September 2025 a preliminary list of occupations that customarily and regularly received tips on or before December 31, 2024. Expect to see a final list posted to the federal register in the future.
Cornell Law School LII has published the new law which you can read for other requirements and limitations.
Be advised that the deduction is for income taxes and will not reduce the payroll taxes on the qualified tips.
My daughter has been a restaurant server for ten years or so, and I always help her with her taxes, so I’ve watched this part of the tax bill with interest. As to reporting tips for tax purposes, this has already become pretty automated. For one thing, most people tip on credit cards rather than cash these days, so it’s easy to track. There’s a formula restaurants use to report tip income for their staff that I take it is in line with what the IRS requires, knowing that it’s pretty much impossible to be completely accurate when it comes to cash tips. Her W2 reflects all that each year, and her tax filing is very straightforward. As I understand the new deduction, it will come below the line and reduce her taxable income (probably resulting in a refund), not her AGI.
Dana, looking at the Schedule 1 draft, you are correct about the deduction being below the line.
The list is interesting. Given most of the jobs other than servers receive cash tips and not added to a credit card payment, the tips were never reported in the first place.
Do we really think the bills in the jar on the bar or slipped into a hand ever found their way on a 1099? 🤑
I do and have seen first hand wait staff properly report cash tips to their employer to properly include them on their W-2. Preparers should and do ask the appropriate questions of tax clients regarding income not reported on a informational return such as a W-2 or 1099. Are all clients honest? I think I, as preparer, have the right to assume so absent what I know or should know. When information comes to a preparer’s attention that conflicts with a client’s representation a discussion typically occurs and changes are made to the return if needed or either the preparer or the client gets fired.
According to the IRS, the greatest source of unreported earnings are people paid in cash and small business dealing in cash transactions. Hence those signs “cash only” but we have an ATM. At one time IRS estimated 80% of tips were unreported. Now it closer to 40% because of changes in employer reporting rules.
For those concerned with sources of under reporting of taxable income the IRS issued a study in February 2023 on the distribution sources of such under reporting. See their conclusions on page 10 and 11.
Key to me was the following –
…results also illustrate the considerable variation in the extent of underreporting among taxpayers. The majority of returns have no discovered underreported income, and most of the rest are found to have
underreported by less than 20 percent. However, small percentages of returns are found to have substantial underreporting.
I agree that information reporting increases compliance.
I think the key word is discovered.
Two Questions
…such amount is paid voluntarily without any consequence in the event of nonpayment, is not the subject of negotiation, and is determined by the payor…
Will tips added by the establishment, such as for large parties, be considered for the deduction?
It appears that the deduction is above the line, reducing Adjusted Gross Income (AGI). AGI is used to determine eligibility for the Earned Income and other tax credits. Depending on other income sources, this could increase or reduce the credits. The effect on the tax return could be thousands of dollars in either direction for eligible tax payers.
Hey Dan,
Follow up to your question regarding above/below the line deductions for tips –
According to a 7/16/2025 article on the Kitces website the deduction for qualified tips, and certain other new OBBBA deductions are all below the line deductions –
OBBBA introduces several new below-the-line deductions that, like Section 199A, are available to both itemizers and non-itemizers. One of these is the new temporary $6,000 deduction for seniors age 65+, discussed earlier. In addition, OBBBA creates four more below-the-line deductions:
Here is a copy of the 2025 draft schedule 1-A.
Wow, that’s a good reason not to rely on AI, as that’s where I read that it would be above the line.
The Schedule 1 draft you provided does indeed indicate a below the line deduction.
Thanks William.
Good question. We had a family dinner for 16 last Friday and the tip was included.
Great questions Dan. I will not be surprised to see a technical corrections bill or IRS revenue rulings before the end of 2025 (or early 2026) to address and possibility change provisions regarding these and many other items.
Your first question highlights that under the law as currently written there are tips and a subset of qualified tips with different tax rules. All tips are included in taxable income and only qualified tips will be deductible. Millions of restaurants will have to make that determination and properly report. So if the party of 8 gets a mandatory 20% tip tacked on the bill and a party of 7 does not my guess is a tax reporting quagmire has just been created. Serve staff will not like the tax but they also do not like working their tail off and then getting stiffed on any tip, qualified or not. Management will rightly be concerned about proper reporting for transactions that have already occurred.
Your second question regarding will the qualified tips deduction be above or below the adjusted gross income income line reflects your years of experience preparing returns. Given the political election is over I expect that congress will discover that they did not have time to read the 900 page bill they passed and that above the line is not what congress intended.
Will congress and the IRS have the time to make necessary changes to allow for a smooth tax season for all? Hope springs eternal. I hope rules are final before returns are due. I have always preferred to extend than amend when tax issues are uncertain.
Best, Bill
Bill, thanks for the post and the informative links. It will be interesting to see to see how and where this is implemented in the tax forms. For several years I did volunteer taxes near Atlantic City, NJ. We had many clients that were in the hospitality trade. Many would have W-2s from multiple establishments, including event companies. I think the most I saw was a client with 7 W-2s. I anticipate some interesting and confusing discussions in the upcoming tax season. I suspect some will be surprised that the deduction doesn’t cover payroll taxes; that a Married Filing Separate taxpayer is ineligible, and that the deduction sunsets in 2028.
Rick, do really think those chips in casinos given as a tip ever found their way to a W-2?
I agree with the issues you list in your comment, expect there will be more such issues arise when returns are actually prepared and many conversations between preparers and their taxpayers who may have unrealistic expectations of less tax on their return.
The page count of tax returns continues to increase.
It’s my understanding that states and cities will still tax the income. If that is accurate, there will be some new lines on those tax returns as well.
Thanks for an interesting post as usual Bill.
in reading the list I was surprised at some of the occupations which have regularly received tips such as tradesmen.
The variety of occupations and the length of the list of covered occupations with possible deductible tip income does seem to create additional tax complexity.
Thanks for this,Bill. It doesn’t affect us, but I am guessing it will be a headache for our daughter, who is a CPA for a large restaurant company? Chris
It was my expectation in writing this article that few if any Humble Dollar core participants would be directly impacted on their own personal 1040 return by the provision of new code section 224. I worked various jobs as a teenager including waiting tables in a restaurant and as a pizza joint manager while in college. I think it is likely the compliance work to report the tips may exceed any tax savings for restaurant staff. In those low income years my payroll taxes typically exceeded my income tax which often was zero.
It will be interesting to see if the various states adopt many of the new federal tax provisions in state tax laws.
And, Bill, HD is for everyone, so your post is important. C