Why some workers won’t benefit from the deduction

With tax season approaching, millions of workers could soon claim the “no tax on tips” deduction, which offers a tax break for returns filed in 2026. But some experts question which workers will benefit from the policy. 

Enacted via President Donald Trump’s “big beautiful bill,” the provision allows certain workers to deduct up to $25,000 of “qualified tips” per year on federal returns from 2025 to 2028.

The tips deduction phases out, or gets smaller, once modified adjusted gross income exceeds $150,000 for single filers or $300,000 for married couples filing jointly.   

Both Trump and former Vice President Kamala Harris floated “no tax on tips” during the 2024 presidential campaign. Republicans enacted the capped deduction via their multi-trillion-dollar tax-and-spending package in early July.

Approximately 6 million workers report tipped wages, according to IRS estimates released in November. But not all tipped workers qualify.

Both parties promoted the “no tax on tips” deduction as tax relief for working families. But the country’s lowest earners may not be able to claim it, experts say.

“Low-income households do not benefit from no tax on tips because they already don’t pay federal income tax,” Elena Patel, co-director of the Urban-Brookings Tax Policy Center, told CNBC. 

For 2025, workers won’t owe federal income taxes until earnings exceed the standard deduction, which is $15,750 for single filers or $31,500 for married couples filing jointly. Above that, certain tax breaks, such as the earned income tax credit, can also reduce liability below zero.

In 2022, more than one-third of tipped workers, 37%, owed no federal income tax due to low income, according to a 2024 report from The Budget Lab at Yale, a non-partisan policy research center.

An analysis from the Tax Policy Center, a non-partisan think tank, showed similar findings. If tips were tax-free or tax-exempt, only about 60% of tipped workers would benefit, the organization reported in early 2025.

Since the policy was first introduced, there have been questions about which occupations qualify for the “no tax on tips” deduction.

The Treasury Department and IRS released a preliminary list of jobs in September. But certain workers who receive tips via a so-called “specified service trade or businesses,” or SSTBs, from industries including health care, legal, financial services, performing arts and others, are not eligible for the tax break. 

However, SSTB workers may be able to temporarily claim the deduction for 2025 until the Treasury and IRS finalize regulations, based on “transition relief” released by the agencies in November.  

With lingering uncertainty about eligibility, “it’s possible to confuse people into thinking they will qualify for this for future years,” said Garrett Watson, director of policy analysis at the Tax Foundation.