The One Big Beautiful Bill Act (OBBBA, Public Law 119-21) created a federal income tax deduction of up to $25,000 for qualified tips for tax years 2025 through 2028 (IRC §224). For most tipped workers the full deduction is available. Higher earners see it shrink gradually, not all at once: the $25,000 maximum starts to fall once modified adjusted gross income (MAGI) passes $150,000 for single filers ($300,000 for joint filers) and is reduced by $100 for each $1,000 of MAGI above that line. There is no cliff. A single filer's deduction is gone entirely at $400,000 of MAGI and a joint filer's at $550,000. MAGI is adjusted gross income plus any income excluded under sections 911, 931 or 933 (for example the foreign earned income exclusion). Because the tips deduction is claimed on Schedule 1-A and reduces taxable income (Form 1040, line 13b) rather than AGI, it does not lower the AGI that this test looks at. This guide shows the formula, three 2026 worked examples, what the phase-out does to your marginal tax rate, and how choices that lower MAGI (a traditional 401(k), an HSA) win back deduction at the same $100 per $1,000 rate.
The tips-deduction phase-out is a straight-line reduction. Understanding it lets you calculate your available deduction at any MAGI between $150,000 and $400,000 (single) or between $300,000 and $550,000 (MFJ).
Available deduction = the smaller of your qualified tips and [$25,000 − ($MAGI − $150,000) ÷ 10] for single filers. ($100 for each $1,000 of excess is the same as one-tenth of the excess.)
For MFJ: Available deduction = the smaller of your qualified tips and [$25,000 − ($MAGI − $300,000) ÷ 10].
If the result is negative, the deduction is $0 — it cannot go below zero. The examples on this page use round $1,000 amounts.
MAGI $150,000: Excess = $0. Reduction = $0. Deduction available = $25,000 (full).
MAGI $160,000: Excess = $10,000. Reduction = $1,000. Deduction available = $24,000.
MAGI $175,000: Excess = $25,000. Reduction = $2,500. Deduction available = $22,500.
MAGI $190,000: Excess = $40,000. Reduction = $4,000. Deduction available = $21,000.
MAGI $200,000: Excess = $50,000. Reduction = $5,000. Deduction available = $20,000.
MAGI $250,000: Excess = $100,000. Reduction = $10,000. Deduction available = $15,000.
MAGI $300,000: Excess = $150,000. Reduction = $15,000. Deduction available = $10,000.
MAGI $400,000: Excess = $250,000. Reduction = $25,000. Deduction available = $0.
MAGI $300,000: Full $25,000 deduction available.
MAGI $325,000: Excess = $25,000. Reduction = $2,500. Deduction = $22,500.
MAGI $350,000: Excess = $50,000. Reduction = $5,000. Deduction = $20,000.
MAGI $450,000: Excess = $150,000. Reduction = $15,000. Deduction = $10,000.
MAGI $550,000: Excess = $250,000. Reduction = $25,000. Deduction = $0.
Inside the range, each extra $1,000 of MAGI reduces the deduction by $100, which adds $100 back to taxable income. On top of the ordinary tax on the extra $1,000, you therefore pay tax on another $100: at the 22% bracket the extra federal income tax on the next dollar of MAGI is 22% + (10% × 22%) = 24.2 cents; at the 24% bracket it is 24% + 2.4% = 26.4 cents. The same arithmetic runs in reverse when MAGI falls.
Even within the phase-out range, the deduction cannot exceed your actual qualified tip income. If a single filer has $175,000 MAGI but only $8,000 in qualified tips, their available deduction is the lesser of $22,500 (phase-out result) or $8,000 (actual tips) — so $8,000. The cap is always the lower of the phase-out amount and actual qualified tip income.
Most tipped workers — restaurant servers, bartenders, delivery drivers — earn well below the $150,000 MAGI threshold and receive the full deduction without concern. Because MAGI counts all income (wages, tips, business income, investment income and, on a joint return, your spouse's income), the phase-out mainly affects workers with large combined income.
Examples of situations that can push MAGI above $150,000 (single) or $300,000 (joint): a high-volume bartender or server in an expensive market whose wages and tips together are very large; a casino dealer or hotel banquet worker with substantial base pay on top of tips; a self-employed tipped worker with significant business profit; or a tipped worker with a high-earning spouse or large investment income. These are illustrations, not typical incomes; this guide does not rely on median-wage statistics.
The deduction only applies to tips received in an occupation on the Treasury list of occupations that customarily and regularly received tips on or before December 31, 2024 (final regulations published April 2026). Tips must be voluntary and not negotiated. Tips received in a specified service trade or business are excluded by statute, but under IRS Notice 2025-69 the IRS will treat workers in a listed occupation as not in an SSTB until final SSTB rules take effect. Confirm your own occupation on the list before relying on any figure on this page.
A common misconception about the OBBBA tips deduction is that it reduces both income tax and FICA. It does not. The phase-out of the deduction changes federal income tax only — FICA remains fully applicable to all tip income at every AGI level.
The OBBBA deduction reduces federal taxable income, which reduces the federal income tax calculated on Form 1040. As MAGI rises through the phase-out range, less deduction is available, so federal taxable income is higher and more income tax is owed. FICA — Social Security (6.2%) and Medicare (1.45%) — operates entirely separately. FICA is calculated on gross wages and tips at the time of earning and is not affected by deductions, phase-outs, or MAGI levels.
A cruise ship worker earning $210,000 in tips and $20,000 in base wages — total $230,000 gross — owes FICA on all $230,000 (up to the Social Security wage base of $184,500 for 2026, then just Medicare on the remainder). That FICA bill exists regardless of whether the income tax deduction phases out entirely. The worker in the phase-out range is losing income tax relief only — not getting a new FICA bill. High earners above $200,000 in total compensation also face the Additional Medicare Tax of 0.9% on compensation above $200,000. That, too, is unchanged by the OBBBA or its phase-out.
Workers in the phase-out range face the worst of both worlds on the deduction: they have high tip income generating significant FICA, while the income tax benefit is being reduced. This is why MAGI-lowering choices — described in the planning section below — are worth understanding for workers in the $150,000–$400,000 MAGI phase-out range: each $1,000 of MAGI removed restores $100 of deduction.
The following three examples illustrate the deduction and phase-out at concrete income levels. All figures assume single filer status, 2026 tax year, and the 2026 standard deduction of $16,100. Federal income tax brackets are the 2026 inflation-adjusted rates (Rev. Proc. 2025-32); tax figures are rounded. In each example MAGI equals AGI, and the tips deduction is subtracted after AGI (Schedule 1-A, Form 1040 line 13b) together with the standard deduction to reach taxable income.
A high-volume bartender at a Las Vegas Strip casino earns $130,000 in qualified tips plus $15,000 in base wages = $145,000 AGI. MAGI is below the $150,000 threshold — the full $25,000 OBBBA deduction applies.
Federal taxable income: $145,000 − $16,100 standard deduction − $25,000 OBBBA deduction = $103,900.
Federal income tax at 22% marginal bracket (approximate): Roughly $17,570 on $103,900.
Without the OBBBA deduction: Taxable income would be $128,900, federal income tax approximately $23,530.
Tax saved by OBBBA: Approximately $5,960 (the first $1,800 of the $25,000 is taxed at 22%, the rest at 24%).
FICA: Applies to all $145,000. Employee FICA ≈ $11,093 (7.65% of $145,000; the $184,500 Social Security wage base is not exceeded).
A senior event coordinator at a luxury hotel receives $90,000 in gratuities from large events plus $85,000 in base salary = $175,000 AGI. Phase-out calculation (MAGI $175,000): $175,000 − $150,000 = $25,000 excess. $25,000 ÷ 10 = $2,500 reduction. Available deduction = $25,000 − $2,500 = $22,500.
Federal taxable income: $175,000 − $16,100 standard deduction − $22,500 OBBBA deduction = $136,400.
Federal income tax at 24% marginal bracket (approximate): Roughly $25,330.
Without OBBBA: Taxable income $158,900 → income tax approximately $30,730. OBBBA saving at this AGI level: approximately $5,400 (24% × $22,500).
Phase-out cost vs. full deduction: Had AGI been $148,000 (full deduction available), the saving would have been $6,000. Phase-out cost = $600 lost benefit (24% × the $2,500 of deduction lost).
FICA: 7.65% × $175,000 (below the $184,500 Social Security wage base, so the full 7.65% applies) ≈ $13,388 employee FICA.
A senior cruise ship hospitality director receives $170,000 in gratuities plus $35,000 in base wages = $205,000 AGI. Phase-out calculation (MAGI $205,000): $205,000 − $150,000 = $55,000 excess. $55,000 ÷ 10 = $5,500 reduction. Available deduction = $25,000 − $5,500 = $19,500.
Federal taxable income: $205,000 − $16,100 standard deduction − $19,500 OBBBA deduction = $169,400.
Federal income tax at 24% marginal bracket (approximate): Roughly $33,250 on $169,400.
Without the OBBBA deduction: taxable income $188,900 → income tax approximately $37,930. OBBBA saving at this AGI level: approximately $4,680 (24% × $19,500). The phase-out costs this worker about $1,320 (24% × the $5,500 of deduction lost) compared with the full deduction — a gradual cost, not a cliff.
FICA: Social Security 6.2% applies up to the $184,500 wage base = $11,439; Medicare 1.45% applies to all $205,000 = $2,973; Additional Medicare Tax 0.9% on $5,000 above $200,000 = $45. Total employee FICA ≈ $14,457.
Note: FICA figures are approximations. The Social Security wage base for 2026 is $184,500 (IRS Topic no. 751).
MAGI — not gross income — determines where you fall in the phase-out range. Inside the range every $1,000 of MAGI you remove restores $100 of deduction, so the ordinary bracket saving from a MAGI-lowering choice is topped up by 10% of the same amount at your bracket rate. You do not need to get all the way below $150,000 for this to matter: it applies at every point in the range. It stops applying once MAGI is at or below the threshold, or once your deduction is limited by your actual tips rather than by the phase-out.
Contributions to a traditional 401(k) reduce your W-2 wages before AGI is calculated. The 2026 employee contribution limit is $24,500 (under age 50), with catch-up contributions above that for workers 50 and over. Example for a single filer with at least $25,000 of qualified tips and $165,000 of AGI before any contribution: with no contribution the deduction is $23,500 (a $1,500 reduction), taxable income is $125,400 and federal income tax is $22,694. A $24,500 traditional 401(k) contribution lowers AGI to $140,500 — below the threshold — so the full $25,000 deduction is available; taxable income is $99,400 and federal income tax is $16,580. The difference is $6,114, about 25 cents per dollar contributed; $330 of it comes from the $1,500 of deduction won back and the rest is the ordinary bracket saving.
Traditional IRA contributions may also reduce AGI, but only if you are not covered by a workplace retirement plan — or if you are, only up to certain income limits. For 2026, single filers covered by a workplace plan begin losing the IRA deduction at $81,000 and it is gone at $91,000. Workers in the $150,000–$400,000 phase-out range who are covered by a workplace plan cannot deduct traditional IRA contributions. However, workers not covered by a workplace plan (common among independent contractors and some gig workers) can deduct traditional IRA contributions, reducing AGI by up to $7,500 ($8,600 if age 50+).
Some tipped workers operate as independent contractors — event planners, private chefs, personal trainers who receive gratuities. These workers can contribute to a SEP-IRA (an employer contribution of up to 20% of net earnings from self-employment after the deduction for half of self-employment tax, capped at $72,000 for 2026) or a Solo 401(k) (up to $24,500 as an employee deferral plus an employer contribution on the same 20% basis, within the $72,000 overall cap). These contributions reduce AGI directly. For a self-employed worker the tips deduction is also limited to the net income from the business in which the tips were earned.
Workers enrolled in a High Deductible Health Plan (HDHP) can contribute to an HSA — $4,400 for self-only coverage or $8,750 for family coverage in 2026. HSA contributions reduce AGI. Combined with 401(k) contributions, they can provide meaningful MAGI reduction for workers inside the phase-out range.
For divorce agreements executed before January 1, 2019, alimony paid is still deductible from AGI. This is an edge case, but workers with pre-2019 divorce agreements should confirm whether alimony paid is reducing their AGI as expected.
The phase-out reduces the deduction by $100 for every $1,000 of excess MAGI — 10 cents of deduction per dollar. At the 24% bracket, each additional $1 of MAGI above $150,000 costs 24 cents of ordinary tax plus 2.4 cents from the lost deduction (10 cents × 24%), 26.4 cents in total; at the 22% bracket the total is 24.2 cents. Run the other way, every $1 of MAGI you remove inside the range saves about that much, as arithmetic — not a guaranteed saving, since it depends on your actual bracket and on having enough qualified tips to use the restored deduction.
The joint threshold ($300,000) is double the single threshold ($150,000) and the reduction rate is the same $100 per $1,000, so a joint return's deduction is fully gone at $550,000 (single: $400,000). Important: the $25,000 maximum is per return, not per person — a married couple filing jointly gets one $25,000 cap even if both spouses receive tips. Married taxpayers must file jointly to claim the deduction, so two spouses cannot each claim a separate $25,000 by filing separately.
Only combined MAGI counts on a joint return. A tipped worker with $160,000 of income would be $10,000 into the single phase-out range, but married to a spouse who earns $80,000 the joint MAGI is $240,000 — below the $300,000 threshold — so the full $25,000 is available. For example, with $60,000 of tips inside $240,000 of joint income, 2026 taxable income is $240,000 − $32,200 − $25,000 = $182,800; federal income tax is $29,640 versus $35,140 without the deduction, a saving of $5,500 (the deduction sits in the 22% bracket).
The cap does not double: two tipped spouses share one $25,000 deduction, and their combined MAGI is what is tested. If each spouse has $160,000 of income, joint MAGI is $320,000, the excess is $20,000, the reduction is $2,000, and the joint deduction is $23,000 (also limited to the couple's combined qualified tips). Their combined qualified tips can be well above $25,000, but the deduction still tops out at $25,000 for the return.
Because the phase-out thresholds double for joint filers while the $25,000 maximum does not, a couple in which both spouses are tipped has the same maximum deduction as a single tipped worker, with more income headroom before the phase-out starts. For couples whose joint MAGI is high, the deduction is reduced at the same rate ($100 per $1,000 above $300,000) and is fully gone at $550,000.
Married taxpayers must file jointly to claim the deduction, so there is no filing-status choice to make for this deduction alone. Couples with joint MAGI above $300,000 should model the full tax picture — the deduction will be partly phased out (and fully gone only at $550,000), and other deductions (mortgage interest, charitable contributions, state and local taxes) may become relatively more valuable as itemised deductions at high income levels.
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