IRS Finalizes Guidance on New Tips Tax Deduction
The IRS has issued final regulations for the new federal tax deduction for qualified cash tips created under the One Big Beautiful Bill Act (OBBBA). Available through 2028, the deduction allows eligible taxpayers to deduct up to $25,000 of qualified tips, regardless of whether they itemize deductions.
The deduction begins phasing out when modified adjusted gross income exceeds $150,000 ($300,000 for joint filers).
Key Highlights
Expanded eligible occupations: The IRS increased the list of qualifying occupations from 68 to 71, adding visual artists, floral designers, and gas pump attendants.
Digital assets excluded: Cryptocurrency and other digital assets do not currently qualify as cash tips for purposes of the deduction.
Voluntary payments required: Mandatory service charges and automatic gratuities do not qualify. Customers must have the ability to reduce a tip amount to zero for it to be considered voluntary.
Manager and supervisor rules: Tips received through tip pools generally do not qualify, although direct tips for services personally performed may be eligible.
Anti-abuse protections: The IRS included rules to prevent wages or other compensation from being reclassified as tips solely to claim the deduction.
The final regulations provide important clarification for workers and businesses in tipped industries. Taxpayers claiming the deduction should ensure their tips meet the IRS's definition of qualified tips and maintain appropriate documentation. Please contact a member of our team to discuss this and any other payroll issues you may have!
