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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.