Core Points - The new federal income tax deduction for tips is more complex than the slogan "no tax on tips" suggests, with specific income caps and eligibility requirements [1][2] - The deduction could save tipped workers an average of approximately $1,985 annually, depending on their adjusted gross income (AGI) [2] Eligibility and Income Limits - Not all service workers receiving tips qualify for the deduction; there are strict income limits to prevent high earners from misclassifying wages as tips [3][4] - The deduction phases out for modified adjusted gross income (MAGI) above $150,000 for single filers and $300,000 for married couples filing jointly [7] Qualified Occupations - The IRS has a list of over 60 "qualified occupations" that are eligible for the deduction, which includes various service roles [5][8] - Independent contractors can also claim the deduction, but it cannot exceed the net income from the business where the tips were earned [8] Deduction Details - Workers can deduct up to $25,000 a year in qualified tips, which lowers their AGI and can help them qualify for other tax credits [6] - Qualified tips include voluntary, non-negotiated payments from customers, while automatic service charges do not qualify [6] Reporting and Recordkeeping - Tips must be reported separately on a W-2, and workers should use Box 7 or Box 14 for their deductions [11][15] - Maintaining accurate records of cash tips is crucial, as failure to do so can complicate the deduction process [13][19] Implementation Timeline - The deduction applies to tips earned in the 2025 tax year, and workers can claim it when filing their 2025 tax return [21]