New Bill Creates Temporary $35,000 Tax Deduction for Reported Tips, but High Earners Get Phased Out Fast

The Working for Tips Tax Relief Act of 2025 is setting up a temporary federal income tax deduction for certain reported tips, kicking off for the 2025 and 2026 tax years. Simply put, if you work a job where tips are customary—think servers, bartenders, delivery drivers—this bill aims to let you keep more of that reported tip money by excluding it from your taxable income.

The Tip-Off: What Qualifies and What Doesn't

This new deduction is straightforward: it equals the amount of "qualified tips" you report, up to a maximum of $35,000 per year (Sec. 2). This is a big deal because it’s available even if you don't itemize deductions. However, the bill has strict rules about what counts. The tips must be voluntarily paid by the customer, not negotiated, and must be properly reported on specific tax forms. The Treasury Secretary is tasked with publishing a list of qualifying tipped occupations within 90 days of the law’s enactment, which is critical for implementation.

Crucially, this relief is not available if you work in a "specified service trade or business" as defined under existing tax law (IRC section 199A(d)(2)). That definition typically includes fields like law, accounting, health, and financial services. So, if you're a massage therapist or a financial advisor who gets tipped, you might be out of luck, even if your occupation customarily receives tips, depending on how the Treasury interprets this exclusion.

The Income Cliff: Who Benefits Most

While the $35,000 maximum sounds great, the bill targets relief squarely at lower and middle-income workers through a very aggressive income phase-out (Sec. 2). The deduction starts to shrink once your modified adjusted gross income (MAGI) hits $50,000. For every $500 you earn over that threshold, your deduction is reduced by $50. If your MAGI reaches $75,000, the deduction disappears entirely.

• Real-World Example: Imagine a server in a busy urban restaurant who reports $30,000 in tips. If their total MAGI is $45,000, they get the full $30,000 deduction. If their MAGI is $62,500, they lose half the deduction. If their MAGI is $75,000 or more, they get nothing. This means the benefit is heavily concentrated on workers who truly rely on tips to reach a moderate income level, but it creates a steep penalty for those who cross the $50,000 threshold.

For married taxpayers, there’s an added hurdle: you must file a joint return to claim this deduction. If you file separately, you won't be able to use it.

Administrative Cleanup and The Clock

Because this is a temporary measure (only 2025 and 2026), the bill includes several administrative requirements to make sure it works. The Treasury Department must modify income tax withholding procedures starting in 2026 to account for this new deduction, which means less money taken out of qualifying paychecks. They also have to issue anti-abuse rules to prevent people from improperly reclassifying wages as tips to claim the tax break (Sec. 2).

Another interesting provision gives the Treasury Secretary the authority to review living wage estimates annually and potentially adjust the deduction or the income thresholds. This introduces a layer of flexibility, but also uncertainty, as the rules could change year-to-year based on administrative review. Once the deduction expires after 2026, the Secretary is required to start a pilot program to study the benefits of making a similar tax exemption permanent, suggesting this temporary fix is a trial run for a longer-term policy.