Beginning with the 2025 tax year, a new federal tax provision, from the One Big Beautiful Bill, allows many tipped employees to deduct a portion of their tip income when calculating their federal income taxes. This change applies only to tax years 2025 through 2028, unless Congress acts to extend or modify it.
Under the current law, eligible workers in tip-based occupations may deduct up to $25,000 in qualifying tip income per year from their federal taxable income, subject to income limits. This does not eliminate the requirement to report tips, and it does not remove payroll taxes such as Social Security or Medicare. Tips remain taxable at the state and local level as well.
For tipped employees, this deduction could reduce federal income tax owed at filing time, potentially increasing refunds or lowering balances due. However, because the provision is temporary, workers should be cautious about treating it as a permanent change to take-home pay. Financial planning decisions should still assume that tip income may become fully taxable again after 2028.
Looking ahead, the future of this provision depends on legislative action. If extended, it could become a longer-term benefit for hospitality and service workers. If allowed to expire, tip income would return to prior federal tax treatment starting in 2029. Staying informed and planning conservatively will be key while this temporary window is in effect.
Need help navigating temporary tax changes?
With new federal deductions in place only through 2028, thoughtful tax planning matters more than ever. The team at Filipek & Co. can help you understand how these kinds of changes to deductions affect your situation today—and how to plan ahead for what comes next. Contact us to start a proactive tax planning conversation.
