Tips Deduction
The OBBB provides a temporary, new deduction for “qualified tips,” defined as “cash tips” received by individuals in an occupation that “customarily and regularly” received tips as of December 31, 2024. The deduction, set forth under IRC § 224, is limited to $25,000 per tax year and phases out for higher-income taxpayers. It is available for the 2025–2028 tax years.
To qualify for the deduction, the taxpayer must have received tips that were paid voluntarily. In addition, the deduction is not available for taxpayers who receive tips in the course of a specified service trade or business, as defined in IRC § 199A(d)(2).
The final rule largely tracks a September 2025 proposed rule (REG-110032-25), with clarifications and limited additions.
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