With the limitations detailed below, a deduction up to $25,000 is allowed for qualified tips paid to a taxpayer and reported either on Form W-2 or 1099-NEC. The deduction is allowed whether the taxpayer takes the standard deduction or itemizes deductions. The deduction is available for the 2025 through 2028 tax years.

This is a deduction from the total income used in the calculation of income tax, not from employee Social Security and Medicare taxes on Form W-2, or from self-employment taxes paid on Schedule SE by self-employed workers. The tip credit available to employers in the food or beverage business (restaurants & bars) is similarly unaffected.

For employees receiving Form W-2 from their employer, the amount subject to the deduction should be straightforward–the amount of tips is shown in Box 5 of Form W-2. For self-employed people claiming the deduction, there is no obvious reporting standard for 2025.

This is a “below the line deduction” meaning the deduction affects calculation of tax after limitations affected by AGI. It won’t help a taxpayer qualify for and/or increase the amount of other tax breaks with AGI-based eligibility requirements or phaseouts. This deduction, along with the new deductions for tax on overtime, the additional senior deduction, and new car loan interest will be calculated on the new Schedule 1-A.