Treasury, IRS propose regulations for tax deduction for tipped workers

The proposed regulations also address the definition of "qualified tips" and other requirements taxpayers must meet to claim the deduction.

Treasury Secretary Scott Bessent said his first job was as a busboy.

"I took my first job as a busboy when I was just 9 years old. I cleared tables at a local cafeteria and set up chairs and umbrellas at a beach nearby. And I depended on tips for a significant portion of my income," Bessent said Monday. "To this day, tens of millions of Americans depend on tips to feed their families, pay their rent, and make ends meet."

Bessent said it would make the tax code fair.

"This is critical to our goal of achieving Parallel Prosperity by building an economy where Main Street and Wall Street grow together," Bessent said. "All workers deserve an equal chance to pursue the American Dream."

The temporary tax provision, enacted with the One Big Beautiful Bill Act, allows employees and self-employed people to deduct up to $25,000 of qualified tips they received in a year, per return.

Eligible taxpayers may claim the deduction on their 2025 tax return that they file next year.

Eligible taxpayers who itemize their deductions and those who do not itemize and take the standard deduction can deduct qualified tips.

The deduction phases out for taxpayers with incomes above $150,000 (or $300,000 in the case of a joint return).

Republicans' multitrillion-dollar OBBBA made permanent the expiring 2017 Tax Cuts and Jobs Act's reduced tax rates; $15,000 standard deduction; $2,000 Child Tax Credit; 20% qualified business income deduction for small businesses; and $750,000 home mortgage interest deduction cap.

The OBBBA also included temporary tax provisions set to expire in 2030, including a quadrupling of the $10,000 state and local tax (SALT) deduction cap; a $6,000 deduction for seniors; and temporary tax deductions for tips and overtime pay, capped for single filers at $25,000 and $12,500, respectively.

The Tax Policy Center said the deduction for tip income will help about 3% of tax units by an average of about $1,370 (or about $40 on average across all tax units). The benefits are largest for the middle 60% of taxpayers when measured as a percentage of after-tax income.

Abir Mandal, a senior policy analyst at the Tax Foundation, called it bad policy.

"These sorts of tax exemptions introduce severe inequity in the tax code. Two workers earning the same salary could face entirely different tax burdens simply because of the nature of their respective jobs," Mandal wrote. "A bank teller earning $30,000 per year in a state with a 5% flat income tax rate would pay nearly 65% more in income taxes, compared with a waiter down the street who also makes $30,000 a year between his income and tips."