Guide ยท tax year 2026
No tax on tips: how it really works
From 2025 through 2028, workers in tipped jobs can deduct up to $25,000 of tips a year from federal taxable income.
Figures checked against official sources on October 11, 2026.
The rules
- Limit: $25,000 of qualified tips a year.
- Income limit: the deduction shrinks by $100 for every $1,000 of income above $150,000 ($300,000 on a joint return).
- Who: people in occupations that customarily received tips before 2025, such as servers, bartenders, hairdressers and delivery drivers. The IRS publishes the list.
- What counts: voluntary cash and card tips, including shared tips. Service charges added automatically to a bill do not count.
- Not available to married people who file separately.
What is still taxed
Tips remain wages for Social Security and Medicare, so 7.65% still comes out. Tips must still be reported to your employer.
What about state income tax?
It depends on the state. Arizona, Idaho, Indiana (2026 only), Iowa, Michigan, Montana, North Dakota and Oregon also take the federal deductions for tips and overtime off state taxable income. Colorado follows the tips deduction but taxes overtime in full. Georgia excludes up to $1,750 of tips and up to $1,750 of overtime premium pay. Alabama lets you deduct up to $1,000 of overtime premium pay. Every other state with an income tax still taxes tips and overtime in full. The calculator applies each state's rule.
A worked example
A server with $24,000 in wages and $22,000 in tips has $46,000 of income. Without the deduction, federal income tax would be $3,340. With it, $790: a saving of $2,550. Social Security and Medicare take $3,519 either way.
Questions
Are tips taxed in 2026?
Up to $25,000 of qualified tips can be deducted from federal taxable income. Social Security and Medicare still apply, and so does state income tax in most states.
Do I need to report tips if they are deductible?
Yes. Report them as before. The deduction is claimed on your tax return.
Which states do not tax tips?
Arizona, Idaho, Indiana (2026 only), Iowa, Michigan, Montana, North Dakota and Oregon also take the federal deductions for tips and overtime off state taxable income. Colorado follows the tips deduction but taxes overtime in full. Georgia excludes up to $1,750 of tips and up to $1,750 of overtime premium pay. Alabama lets you deduct up to $1,000 of overtime premium pay. Every other state with an income tax still taxes tips and overtime in full.
Is a service charge a tip?
No. An amount the business adds to the bill automatically is a service charge, not a tip, and does not qualify.