No Tax on Tips Deduction (§224)

The No Tax on Tips Deduction is a new above-the-line federal income tax deduction created by OBBBA §70201, codified at IRC §224, that lets workers in customarily-tipped occupations deduct up to $25,000 in qualified tip income per year.

The basic rules.

• Amount: Up to $25,000 of qualified tips (per return — not doubled for joint filers).
• Above the line: Available whether you take the standard deduction or itemize.
• Phase-out: Begins at $150,000 MAGI (single) / $300,000 MAGI (MFJ); reduces $100 per $1,000 of MAGI over threshold.
• Years: Tax years 2025–2028. The deduction sunsets after December 31, 2028 unless Congress extends.
• Joint filing required: Married Filing Separately cannot claim. SSN required on return.

Qualified tips. Tips must be voluntary — the customer must have the option to leave zero. Mandatory service charges and automatic gratuities do not qualify. Tips must be received in an occupation that “customarily and regularly received tips” on or before December 31, 2024, as listed by Treasury.

The Treasury Tipped Occupation Code (TTOC) list. Treasury and IRS published proposed regulations on September 19, 2025 (IR-2025-92) and final regulations on April 10, 2026 (T.D. 10044; IR-2026-49; Federal Register publication April 13, 2026) listing 71 occupations organized into 8 broad categories. IRS Commissioner Frank J. Bisignano said in IR-2026-49: “Taxpayers are already benefiting from No Tax on Tips since the IRS already is issuing refunds to eligible workers.” Critically for ELM readers:

• TTOC 802 — Taxi and Rideshare Drivers and Chauffeurs. Includes “cab driver, personal driver” and (per the final regs) Uber/Lyft drivers.
• TTOC 804 — Goods Delivery People. The final regulations explicitly added “app/platform based delivery person” to address DoorDash, Instacart, Uber Eats, and similar workers.

The trap: SE tax still applies. §224 reduces only federal income tax. Social Security and Medicare (FICA for W-2 tipped workers; SECA for self-employed) still apply to the full tip amount. The deduction also has no effect on state income tax in most states.

Worked example. A rideshare driver earns $34,000 in fares plus $7,000 in qualified tips in 2026, with MAGI of $40,000 (well below the $150,000 phase-out threshold). The driver:

• Reports the full $41,000 on Schedule C line 1
• Deducts business mileage on line 9
• Calculates SE tax on net SE earnings — including the $7,000 of tips
• Claims a $7,000 deduction on Schedule 1-A → carried to Form 1040 — eliminating federal income tax on the tips
• At a 12% marginal bracket, the tax savings are ~$840

The driver keeps the full Social Security earnings credit for those $7,000 of tips because SECA is computed before §224.