The One Big Beautiful Bill Act, enacted on July 4, 2025 as Public Law 119-21, introduced a wide range of changes that will impact tax returns for the 2025 tax year and beyond.
Starting in tax year 2025 through 2028, taxpayers can deduct tips as a below-the-line deduction up to a maximum of $25,000 per return (not per taxpayer). The allowable deduction is calculated on Schedule 1-A (Form 1040).
Tips will continue to be reported on Form W-2 and continue to be subject to federal income tax withholding along with FICA and Medicare tax as in previous years. Deducted tip income will still be considered earned income for the purposes of the Earned Income Tax Credit and Child Tax Credit.
This deduction is gradually phased out for taxpayers with a Modified Adjusted Gross Income (MAGI) over the thresholds, reduced by $100 for every $1,000 over the threshold. (MAGI equals AGI with any foreign-earned income exclusion added back.) Additionally, married taxpayers must file jointly to claim this deduction.
The following thresholds are in effect for tax year 2025:
- Single, Head of Household - $150,000
- Married Filing Jointly - $300,000
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