Deductions · calculator
No tax on tips: the deduction and what it is worth
A deduction, not an exemption: how much of your tips it covers and how much federal income tax it removes.
No tax on tips: your deduction and what it saves
Tips deduction (Schedule 1-A line 13)
$18,000
Federal income tax saved: about $2,160
- Tips counted (capped at the maximum)$18,000
- Phase-out reduction$0
- Your marginal bracket before the deduction12%
- Social Security and Medicare still withheld on these tips$1,377
Only tips received in an occupation on the IRS list of tipped occupations count. A valid SSN is required, and a married couple must file jointly.
No tax on tips is a deduction of up to $25,000 a year of qualified tips, created by section 70201 of Public Law 119-21 for tax years 2025 through 2028 and claimed on Part II of Schedule 1-A. It lowers taxable income, not the tips themselves: Social Security and Medicare taxes of 7.65% are still withheld, and each state decides its own income tax. The deduction shrinks by $100 for every full $1,000 of modified adjusted gross income above $150,000, or $300,000 on a joint return, so the full $25,000 is gone at $400,000 for a single filer. A server with $18,000 of reported tips and $52,000 of modified AGI deducts all $18,000 and saves about $2,160 of federal income tax in 2026, because each deducted dollar is worth her marginal rate. Tips must be received in an occupation on the IRS list of tipped occupations, the worker needs a valid Social Security number and a married couple must file jointly.
Checked by Radif Partners · Editorial policy · How we calculate
The Schedule 1-A arithmetic, line by line
Part II of Schedule 1-A takes qualified tips received as an employee (line 4) and as a self-employed worker (line 5, never more than the net profit of that business), keeps the smaller of the total and $25,000 (line 7), then compares your modified AGI with $150,000 or $300,000 (lines 8 to 10). The excess is divided by $1,000 and the result is rounded down to a whole number (line 11): $1,500 over the threshold counts as one step, not one and a half. Each step removes $100 (line 12). Modified AGI here is Form 1040 line 11b plus excluded foreign income, so the tips themselves are already inside it.
| Modified AGI (single) | Tips | Reduction | Deduction |
|---|---|---|---|
| $140,000 | $25,000 | $0 | $25,000 |
| $155,000 | $25,000 | $500 | $24,500 |
| $175,000 | $25,000 | $2,500 | $22,500 |
| $250,000 | $25,000 | $10,000 | $15,000 |
| $400,000 | $25,000 | $25,000 | $0 |
What the deduction saves depends on your bracket
A deduction removes income from the top of your tax bill, at your marginal rate. Most tipped workers sit in the 10% or 12% bracket, so $10,000 of deducted tips saves $1,000 to $1,200, not $10,000. A bartender in the 22% bracket saves $2,200 on the same amount. Workers whose income is low enough to owe no income tax gain nothing from the deduction, and the earned income credit is unaffected because it is based on earned income, which still includes the tips.
Schedule 1-A: the four new deductions together
Schedule 1-A line 38
$7,500
About $1,650 of federal income tax saved
| No tax on tips | $0 |
| No tax on overtime | $6,000 |
| Car loan interest | $1,500 |
| Enhanced deduction for seniors | $0 |
All four reduce taxable income, not AGI, and can be claimed with the standard deduction or itemizing. They run from 2025 through 2028.
Married, separated, self-employed
A married couple must file jointly; married filing separately loses the deduction entirely. The $25,000 cap is per return, not per spouse, so two servers married to each other share one $25,000. A self-employed hairstylist can deduct tips up to the net profit of the business, and a delivery driver paid tips through an app can use a daily tip log when the Form 1099-K does not separate them, as in the IRS example of Notice 2025-69. The same return can also claim no tax on overtime.
Sources: IRS Schedule 1-A (Form 1040) 2025, Additional Deductions: tips, overtime, car loan interest, seniors; IRS IR-2025-114 and Notice 2025-69: tips and overtime for tax year 2025, with worked examples; Form 1040-ES (2026), changes to information returns for qualified tips, read on October 11, 2026.