No Tax on Tips Sunset 2028: What Happens When OBBBA Expires?

The OBBBA Tips Deduction Has an Expiration Date

The federal tips deduction enacted under the One Big Beautiful Bill Act (OBBBA) is temporary. The provision applies to tax years 2025 through 2028, then expires unless Congress acts to extend or make it permanent. For tipped workers who have built their budgets around the savings, the 2028 sunset is a significant financial planning consideration. This guide explains the sunset mechanics, the political landscape around extension, and what workers in conforming states should expect if the deduction expires.

The Mechanics of the 2028 Sunset

Understanding how the sunset works helps workers plan accurately.

Which Tax Years Are Affected

The tips deduction applies to qualified tip income received in tax years 2025, 2026, 2027, and 2028. Tax year 2025 returns are filed in spring 2026 — the deduction applies. Tax year 2028 returns are filed in spring 2029 — the deduction still applies for that year. Tax year 2029 returns, filed in spring 2030, would have no deduction unless Congress acts. The sunset is at the end of 2028, not the beginning.

FICA Unaffected by Sunset

Because FICA was never reduced by the OBBBA tips deduction, the sunset has no effect on payroll taxes. FICA continues at 6.2% Social Security and 1.45% Medicare on all tip income regardless of what happens to the income tax deduction.

State Conformity After Expiration

If the federal deduction expires, states that simply piggyback on federal AGI would automatically stop providing the deduction — because federal AGI would no longer be reduced. States that passed their own independent tip exemptions (like Georgia's $1,750 exemption) would still need their own expiration or extension legislation, but many state sunset clauses are tied to the federal provision.

Will Congress Extend the Tips Deduction?

Extension is politically plausible but not guaranteed. Here is what the landscape looks like.

Arguments for Extension

The tips deduction is popular with a broad, identifiable constituency — tipped workers are present in every congressional district. The deduction was a prominent campaign pledge. Allowing it to expire in an election year (2028 is a presidential election year) would be politically difficult for supporters of the original legislation. Historical precedent from TCJA extensions suggests Congress tends to renew popular provisions rather than allow scheduled expirations to take effect.

Arguments Against Extension

Budget reconciliation rules constrain how much additional tax reduction can be packed into a given budget window. The cost of making the tips deduction permanent is substantial — hundreds of billions over ten years — and competes with other legislative priorities. If the political composition of Congress shifts, extension becomes less likely.

When to Expect Action

Extension legislation typically emerges in the year before or the year of expiration. Watch for developments in 2027 (pre-election positioning) and mid-2028. If you are making multi-year financial plans, model both scenarios: with extension (current savings continue) and without (full tax on tips from 2029).

Planning Around the Sunset

Smart planning now reduces the financial shock if the deduction expires.

Build Retirement Assets While Savings Are High

The tips deduction increases after-tax take-home pay by up to $5,500/year for full-deduction workers. Directing that additional take-home into a 401(k) or IRA while the deduction applies builds permanent assets that are unaffected by the deduction's expiration. A server contributing an extra $400/month to a Roth IRA over four years (2025-2028) accumulates approximately $19,200 in principal — tax-free in retirement — before the deduction sunsets.

Do Not Build Fixed Expenses Around the Deduction

Avoid committing to recurring fixed expenses — rent increases, car payments, loan payments — that are calibrated to the after-deduction take-home. If the deduction expires, those fixed costs remain while take-home pay drops. Keep the additional income in flexible savings.

Monitor Congress.gov

Track the OBBBA legislation at Congress.gov. Search for bill numbers associated with OBBBA extension — when extension bills are introduced (likely 2027), that is the signal that Congressional action is underway. The IRS will issue guidance updates at irs.gov as the sunset date approaches.