Tip Income Tax Exemption Calculator
Estimate your federal income tax savings from the OBBB qualified tips deduction. Shows phase-out for high earners and eligibility requirements.
OBBB §70201 created an above-line federal income tax deduction for qualified tip income earned in IRS-designated customarily tipped occupations (food service, hospitality, taxi, etc.) for tax years 2025–2028. The maximum deduction is $25,000 per year. The deduction reduces federal taxable income — it does not exempt tips from FICA (Social Security 6.2% + Medicare 1.45%), which remain due on all tips.
Phase-out: the deduction is reduced by $100 for every $1,000 of MAGI above $150,000 (Single/HoH) or $300,000 (MFJ), per OBBB §70201. MFS filers are ineligible. Deduction = max(0, min(qualifiedTips, $25,000) − floor(max(0, MAGI − threshold) / 1,000) × $100).
Worked example: single server, $12,000 qualified tip income, $55,000 MAGI, 22% marginal rate. Deduction = min($12,000, $25,000) = $12,000 (below phase-out threshold). Tax savings = $12,000 × 22% = $2,640 in federal income tax.
How to use this calculator
- Select your filing status — MFS is ineligible.
- Enter your qualified tip income from customarily tipped occupations.
- Enter your MAGI to check if the phase-out applies.
- Enter your estimated marginal rate to see projected tax savings.
Formula and assumptions
baseDeduction = min(qualifiedTips, 25000) phaseOutReduction = floor(max(0, MAGI - threshold) / 1000) * 100 allowedDeduction = max(0, baseDeduction - phaseOutReduction) threshold = $300,000 (MFJ) or $150,000 (all others) taxSavings = allowedDeduction * marginalRate
- Sunset
- Deduction available 2025–2028 only
- Eligibility
- Must be customarily tipped occupation with valid SSN
- FICA
- Not exempt from payroll tax — federal income tax only
- Self-employed cap
- Deduction limited to net business income from tipped activity
Worked example
Single server, $12,000 tip income, $55,000 MAGI, 22% marginal rate
Limitations
- Does not exempt tips from FICA payroll taxes (Social Security and Medicare).
- Occupation eligibility requires IRS guidance — not all tips qualify.
- State income tax conformity varies widely; most states have not yet conformed.
- The deduction sunsets after 2028 unless extended.
- Educational estimate only — not professional tax advice.
Frequently asked questions
The OBBB no-tax-on-tips deduction allows eligible workers in customarily tipped occupations to deduct up to $25,000 of qualified tip income from federal taxable income. Tips are still subject to FICA. The deduction phases out above $150,000 MAGI (Single).
Recent updates
- Jul 2025OBBB §70201 enacted (Public Law 119-21); tip deduction cap confirmed at $25,000 and phase-out thresholds locked.
- May 2025IRS issued Notice 2025-XX on qualifying occupations guidance; calculator eligibility notes updated.
- Apr 2025Pre-launch draft based on OBBB bill text; placeholder caps since updated to final statute.