Also see: In-Depth: IRS Guidance for Recipients of Qualified Tips or Overtime Pay 2025.

CPA Sample Client Letter: Deduction for Qualified Tips.

(Parker Tax Publishing December 2025)

Dear [Client],

This year's sweeping tax and spending bill, the "One Big Beautiful Bill," introduced a new tax break for 2025 to 2028 for taxpayers who receive income in the form of tips.

The new law provides a deduction of up to $25,000 for qualified tips received by a person in a job where tips are common. The deduction is allowed for:

• Employees receiving a W-2 form reporting qualified tips.
• Independent contractors receiving a 1099 form reporting qualified tips.
• Anyone using Form 4317 to calculate the Social Security and Medicare tax owed on qualified tips not reported to an employer.

The deduction is allowed regardless of whether you itemize your deductions or take the standard deduction. However, you must have a Social Security number, and include it on your tax return, in order to claim the deduction. In addition, if you're married, you can only claim the deduction if you file a joint return with your spouse.

The deduction is phased out if your modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return). (Note: Unless you live outside the U.S., your "modified" adjusted gross income will likely be the same as the adjusted gross income reported on your tax return).

Qualified Tips

Qualified tips are defined as cash tips received by an individual in an occupation which customarily and regularly received tips on or before December 31, 2024. Some jobs, such as restaurant server, bartender, and rideshare driver, clearly meet the criteria. For other workers (such as cashiers), we'll only know when the IRS provides a list of qualifying occupations later this year.

A qualified tip must also be paid voluntarily, not be subject to negotiation, and determined by the payor. Tips received by employees under a tip-sharing arrangement may be considered qualified tips, too.

Amounts received for performing services (as either a business owner or employee) in the fields of health, law, accounting, consulting, financial services, brokerage services, performing arts, athletics, and similar businesses aren't qualified tips.

Phaseout

The deduction for tip income is reduced by $100 for each $1,000 by which your modified adjusted gross income exceeds $150,000 ($300,000 in the case of joint filers).

If you'd like to discuss the new deduction for qualified tips or need help figuring out if you qualify, please don't hesitate to call.

Sincerely,

[Your Name, Your Firm]

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com