A deduction from taxable income, not AGI
Eligible taxpayers can claim this deduction alongside either the standard deduction or itemized deductions. It does not reduce adjusted gross income (AGI). The 2025 Form 1040 places the Schedule 1-A deduction after AGI, on line 13b.
Example: $18,000 in qualified tips
Assume a qualifying employee files single, retains $18,000 in qualified reported tips, and has $52,000 MAGI. The tips are below the $25,000 annual cap, and MAGI is below the $150,000 phase-out threshold. The estimated deduction is $18,000. Multiplying by 12% gives a $2,160 illustration, not a promised refund.
How the phase-out rounds
For an otherwise eligible single filer with $25,000 in qualified tips and $150,500 MAGI, the $500 excess counts as one $1,000 increment. The deduction falls by $100 to $24,900. At $151,001 MAGI, the excess counts as two increments: the deduction becomes $24,800. See Part II of Schedule 1-A.
Self-employed tips have another limit
If one qualifying business has $18,000 in tips but $12,000 net income before the deduction, the net-income limit reduces tips considered to $12,000 before applying the annual cap and income phase-out. A loss leaves no deduction for that business’s tips. This calculator models one business; it does not combine several businesses or a mix of employee and business tips.
Check qualification before entering a total
Tips must meet the IRS rules, including an eligible occupation and required reporting. A valid Social Security number is required; married taxpayers must file jointly. Voluntary charged tips and tip shares can qualify. Mandatory service charges and required gratuities do not. Other restrictions can apply. Use the IRS eligibility summary and final regulations.
Keep the amounts you can reconcile
Compare employer statements, amounts reported through the appropriate forms, and your own tip record. A recorded amount or a W-2 entry alone does not prove that every dollar qualifies. Use the free tip log template to separate receipts and tip-outs, and read the tip deduction guide for a source-linked overview.