Qualified Tips (OBBBA)
Definition
The W-2 tip income that is eligible for a federal income tax deduction up to $25,000 under the One Big Beautiful Bill Act (OBBBA).
Key Takeaways
- Allows W-2 tipped employees to deduct up to $25,000 in tips from federal income tax.
- Acts as an above-the-line deduction, lowering your Adjusted Gross Income.
- Phases out starting at $150,000 MAGI for single filers and $300,000 for joint filers.
- Does not exempt tip income from FICA payroll taxes (Social Security and Medicare).
Detailed Explanation
Qualified Tips under the One Big Beautiful Bill Act (OBBBA) represent W-2 tip income received by service, hospitality, and gig workers. The provision, effective for tax years 2025 through 2028, allows qualifying W-2 tipped employees and 1099 contractors in tipped occupations to claim an above-the-line deduction of up to $25,000. This directly reduces their federal Adjusted Gross Income (AGI) and income tax liability.
To ensure the benefits are targeted at low- and middle-income service workers, the deduction is subject to phase-outs based on Modified Adjusted Gross Income (MAGI). The phase-out range starts at $150,000 for single filers (completely phasing out at $400,000) and at $300,000 for married couples filing jointly (completely phasing out at $550,000).