Yes. Tips are taxable income, so they affect how much you owe or get back. For 2025 through 2028, the No Tax on Tips deduction lets eligible workers deduct up to $25,000 of qualified tips on Schedule 1-A. If tax was withheld on those tips during the year, that deduction can turn into a bigger refund.
Key takeaways
- Reported tips are wages for withholding, so tax is taken out during the year.
- The deduction lowers taxable income. If withholding assumed full tax on your tips, the difference comes back as a refund.
- Social Security and Medicare (7.65%) on tips are not refunded by the deduction.
- Unreported or allocated tips added on Form 4137 can reduce your refund, because no tax was withheld on them.
How tips feed into your refund
Your refund is the tax withheld minus the tax you actually owe. Tips you report to your employer are included in W-2 Box 1 and your employer withholds income tax on them. Tips you didn't report, and allocated tips in Box 8, had nothing withheld. Adding them on Form 4137 increases what you owe.
The No Tax on Tips deduction
- Deduct up to $25,000 of qualified tips per year, for tax years 2025 through 2028.
- The deduction phases out once modified adjusted gross income (MAGI) is over $150,000, or $300,000 on a joint return.
- Qualified tips are voluntary cash or charged tips from customers, including tips received through tip sharing. Mandatory service charges don't count.
- The occupation must be on the IRS list of occupations that customarily and regularly received tips on or before December 31, 2024.
- You need a valid Social Security number, and married taxpayers must file jointly.
- It is available whether you itemize or take the standard deduction. You claim it on Schedule 1-A (Form 1040).
- It reduces federal income tax only. Social Security and Medicare taxes (7.65% for employees) still apply to tips.
Estimate your deduction with our calculator: https://ttoccodes.com/tools/tip-deduction-estimator . IRS overview: https://www.irs.gov/newsroom/what-the-no-tax-on-tips-deduction-means-for-you .
Worked example
A single server has $28,000 of wages and $18,000 of qualified tips reported in W-2 Box 7, with MAGI well under $150,000. Their employer withheld income tax as if all $46,000 were taxable. On the 2025 return, the server deducts $18,000 on Schedule 1-A. Their taxable income drops by $18,000, and the income tax they would have paid on it at their marginal rate comes back in the refund. The 7.65% FICA on the tips ($1,377) is not refunded.
How the phase-out affects refunds
The deduction starts shrinking once MAGI is over $150,000, or $300,000 on a joint return. Married couples must file jointly to claim it. If you're near the threshold, the deduction and the refund boost will be smaller.
Adjust withholding if you want the money sooner
If you'd rather have a bigger paycheck than a bigger refund, you can give your employer a new Form W-4 that accounts for the deduction. The IRS has published guidance on updating withholding for the 2025 law changes.
Will the No Tax on Tips deduction increase my refund?
It can. The deduction lowers taxable income by up to $25,000 of qualified tips. If income tax was withheld on those tips during the year, the tax you no longer owe comes back as a refund. It doesn't refund Social Security or Medicare taxes.
Where do I claim the No Tax on Tips deduction?
On Schedule 1-A (Form 1040), Part II. The IRS published it for tax year 2025. It works whether you take the standard deduction or itemize, and married taxpayers must file jointly.
Why did my refund go down after reporting tips?
Tips you add on Form 4137, whether unreported tips or allocated tips from W-2 Box 8, had no tax withheld. Including them raises the tax you owe, which lowers your refund, even though they may still qualify for the tip deduction.
This article is general information, not tax advice. Rules can change; confirm your situation with the current IRS instructions linked above or a tax professional.