The short answer: if you earn tips in a job where tipping is customary, you can deduct up to $25,000 of those tips from your income on your 2026 federal return. You can take the deduction whether you itemize or take the standard deduction. It phases out for higher incomes, and you still pay Social Security and Medicare tax on your tips.
The deduction comes from the 2025 tax law that the IRS now calls the Working Families Tax Cuts. It started with 2025 returns and runs through the 2028 tax year. This guide covers how it works for the return you file in early 2027.
Who qualifies
You can claim the deduction if all of these are true:
- You received qualified tips (more on what counts below).
- Your job is on the IRS's list of tipped occupations. The IRS lists occupations where workers customarily and regularly received tips on or before December 31, 2024. The list is at IRS.gov/TippedOccupations. It covers jobs like servers, bartenders, baristas, hairstylists, nail technicians, hotel housekeepers, valets and delivery drivers, among many others.
- You have a Social Security number that's valid for work. If you're married filing jointly, the spouse who got the tips needs one.
- If you're married, you file jointly. Married couples who file separately can't take this deduction.
- Your income is under the phase-out range, or only partly into it (see below).
Self-employed people can claim it too, with two extra limits. The deduction can't be more than the net profit from the business where you earned the tips. And people in certain professional service businesses, the kind the tax code calls a "specified service trade or business," aren't eligible. If you work for an employer in one of those fields, you're not eligible either.
What counts as a qualified tip
A qualified tip is a voluntary cash or card tip from a customer. That includes:
- Cash tips handed to you
- Tips added to a credit or debit card payment
- Tips you get through a tip-sharing or tip pool arrangement at work
These don't count:
- Mandatory service charges, like an automatic 18% added to a large party's bill, even if your employer passes the money to you. A charge the customer can't decline isn't a tip.
- Tips in an occupation that isn't on the IRS list.
- Tips you didn't report. To deduct a tip, it has to be on your W-2, a 1099 or another statement, or you have to report it yourself on Form 4137.
How much you can deduct
The most you can deduct is $25,000 per return. That's the limit whether you're single or married filing jointly. A married couple who both earn tips still share one $25,000 cap.
The income limit
The deduction shrinks once your modified adjusted gross income (MAGI) passes $150,000, or $300,000 if married filing jointly. For most people, MAGI is the same as the adjusted gross income on Form 1040.
Here's how the reduction works on Schedule 1-A:
- Subtract $150,000 (or $300,000) from your MAGI.
- Divide the result by $1,000 and round down to a whole number.
- Multiply by $100. That's how much your deduction goes down.
In other words, you lose $100 of deduction for every full $1,000 of income over the threshold.
Worked examples
Example 1: A server under the income limit. Maria is single and works as a server. Her W-2 shows $41,000 in wages, including $18,500 in reported tips. Her MAGI is $41,000.
| Step | Amount |
|---|---|
| Qualified tips | $18,500 |
| Capped at $25,000 | $18,500 |
| MAGI over $150,000? | No |
| Tips deduction | $18,500 |
Maria's taxable income drops by $18,500. With the 2026 standard deduction and tax brackets, that cuts her federal income tax from about $2,740 to about $640, a saving of roughly $2,100.
Example 2: A bartender with a high-earning spouse. Sam and Alex are married filing jointly. Sam is a bartender with $30,000 in qualified tips. Their combined MAGI is $318,500.
| Step | Amount |
|---|---|
| Qualified tips | $30,000 |
| Capped at $25,000 | $25,000 |
| MAGI minus $300,000 | $18,500 |
| Divided by $1,000, rounded down | 18 |
| Reduction (18 × $100) | $1,800 |
| Tips deduction | $23,200 |
Example 3: Too much income. If Sam and Alex's MAGI were $550,000, they'd be $250,000 over the threshold. That's 250 × $100 = $25,000 of reduction, which wipes out the deduction completely.
Where to find your tips on your W-2
For 2026, Form W-2 has two new spots for tipped workers:
- Box 12, code TP: the total cash tips you reported to your employer.
- Box 14b: your Treasury tipped occupation code, which tells the IRS which listed occupation you work in.
Your reported tips are also included in box 7 (Social Security tips) and in your total wages in box 1.
If you're self-employed, look for your tips on Form 1099-NEC, 1099-MISC or 1099-K, or in your own records.
If you received tips you didn't report to your employer, you report them on Form 4137. That form also figures the Social Security and Medicare tax you owe on them. Those tips can count toward the deduction once they're reported.
How you claim it
The deduction goes on Schedule 1-A, Part II, a newer IRS form. The total from Schedule 1-A flows to your Form 1040, where it reduces your taxable income.
Navo includes this deduction. It reads your tips from your W-2, asks whether your job is on the IRS list, and fills in Schedule 1-A for you.
Things people often get wrong
- "My tips are tax-free now." Not quite. The deduction lowers your federal income tax. You still pay Social Security and Medicare tax on your tips, and they still count as income for things like the earned income credit.
- "I can deduct my service charges." Mandatory service charges aren't tips, even if they go to you.
- "My spouse and I can each deduct $25,000." The cap is per return, so a married couple shares one $25,000 limit.
- "I don't need to report cash tips anymore." You do. Unreported tips can't be deducted, and leaving them off your return is still underreporting income.
- "My state won't tax my tips either." Your state sets its own rules. Many states start from federal income before this deduction, so your tips may still be taxed on your state return.
Frequently asked questions
Do I need to itemize to take the tips deduction? No. You can take it with the standard deduction or with itemized deductions.
Does the tips deduction lower my Social Security and Medicare tax? No. It only lowers federal income tax.
I'm a hairstylist who rents a booth. Can I deduct my tips? Probably, if your occupation is on the IRS list and you report the tips as business income. Your deduction can't be more than your net profit from the business.
What if I worked two tipped jobs? Add up the qualified tips from both. The $25,000 cap applies to the total. Schedule 1-A has extra instructions for tips from more than one employer or occupation.
Can I claim the deduction if I file married filing separately? No. Married couples have to file jointly to take it.
When does the deduction end? It's scheduled to apply through the 2028 tax year, the return you'd file in 2029, unless Congress changes it.
Related guides
This post is general information, not tax advice for your situation. Sources: IRS, Working Families Tax Cuts: individuals and workers; IRS fact sheet on Schedule 1-A; 2025 Schedule 1-A (Form 1040); 2026 Instructions for Forms W-2 and W-3.