President Trump’s promise of “no tax on tips” for service workers isn’t as straightforward as it sounds. The new federal income tax deduction has strict income caps, rules, and requirements. The deduction allows up to $25,000 a year in qualified tips, reduces AGI, and covers cash, credit card, and pooled tips.

To qualify for the deduction, tips must be voluntary, non-negotiated payments determined solely by the customer. Automatic service charges and non-optional gratuities don’t count. The deduction could save an average single taxpayer in a tipped occupation roughly $1,985 annually, according to the CPA Journal.

Eligibility for the deduction is based on income, with phaseouts starting at $150,000 for single filers and $300,000 for married couples filing jointly. The IRS maintains a list of qualified occupations that historically received tips before Dec. 31, 2024.

Tipped workers should pay attention to reporting requirements, as all credit and debit card tips are already reported on W-2s. Recordkeeping may be a challenge for some, but the IRS is updating forms to make reporting tips easier in the future.

Service workers can choose to have less tax withheld from their tips by updating their W-4 forms. This means more take-home pay throughout the year but a potentially smaller refund or a tax bill next year. Workers can also choose to deduct tips at tax time instead.

To maximize deductions, workers should track cash tips daily and report them monthly if they total $20 or more. Missed reporting cash tips during the year can be rectified with IRS Form 4137, allowing them to count towards the $25,000 deduction.

The new tax rule covers tips earned from Jan. 1 to Dec. 31, 2025, and can be claimed now as workers file their 2025 tax returns. The aim is to provide savings for lower- and middle-income workers in tipped occupations.

Read more at Yahoo Finance: Are tips taxable? Here’s how the new ‘no tax on tips’ deduction works.