What You Need to Know: Tip Income Deduction (2025–2028)

Mimi NEX Finance Pro
Jul 9
2 min read

📄 What You Need to Know: Tip Income Deduction (2025–2028)

The government is proposing a federal income tax deduction for tip income. Here's what that means:

💰 What Is It?

🔹 This means you may pay less federal income tax if you report your tips.

🔹 It does not apply to:

Social Security (FICA)
Medicare
State/local income taxes

Tipped workers (e.g., servers, bartenders, drivers) can deduct up to $25,000 in reported tip income from their federal income tax each year, through 2028.

🧾 Example:

Let’s say you earned:

$20,000 in hourly wages

$15,000 in tips

Before this law:

You paid federal income tax on $35,000.

Now, under the proposed deduction:

You only pay federal income tax on $20,000!

This deduction reduces taxable income on your Form 1040—**not a tax credit**, meaning it's subtracted *before* tax is calculated.

Note that for employees with tips or overtime, this will be treated like a deduction (not an exemption). As a result, this will not affect the pay your employee's receive on their check, rather it will be a credit they can potentially receive when doing their taxes.

🧾 Who Qualifies and How It Works

Available from tax year 2025 through 2028, phasing out for those with MAGI (Modified Adjusted Gross Income) above $150,000 ($300,000 joint).

To use it:

1. Report all tips on your W‑2 (employer payroll).

2. Deduct them on your federal return (up to $25,000).

3. You still pay **Social Security, Medicare, state, and local taxes** on your full tip income.

⚠️ Why This Matters

It lowers federal taxable income, boosting take-home pay.
Does **not reduce** FICA (Social Security/Medicare), state, or local tax obligations.
Remains in effect for the 2025–2028 tax years only.