Qualified and Non-Qualified tips

Qualified Tips

Qualified tips are amounts a taxpayer can deduct from their federal taxable income. To be "qualified," a tip must meet several specific IRS criteria:  

• Voluntary: The amount must be paid by the customer voluntarily and without negotiation or obligation. Automatic service charges or mandatory gratuities do not qualify. 
• Eligible Occupation: The tip must be received in an occupation that the IRS has listed as one that "customarily and regularly received tips" before December 31, 2024. Examples include food and beverage service, hospitality, and transportation roles. 
• Form of Payment: Tips can be cash, checks, credit card payments, or electronic payments, provided they are cash denominated. Non-cash tips (e.g., tickets, gifts) do not qualify. 
• Eligible Business: Tips cannot be from specified service trades or businesses (SSTBs), which include fields like health, law, accounting, or financial services. 
• Reported: The tips must be reported to the employer (if applicable) or reported directly to the IRS on Form 4137.  

Non-Qualified Tips 

Non-qualified tips or payments are amounts that are still considered taxable income but are not eligible for the new federal tax deduction. They include:  

• Mandatory Service Charges/Auto-gratuities: Any amount automatically added to a customer's bill without an option to modify or remove it is considered a service charge (wages) and is not a qualified tip. 
• Tips from Ineligible Occupations: Tips received in an SSTB (e.g., a bonus given to an accountant or a tip to a lawyer) do not qualify for the deduction. 
• Non-Cash Items: Tips received in the form of goods or services, such as event tickets or a meal, are non-qualified. 
• Income Limits: Individuals with a modified adjusted gross income (MAGI) over a certain threshold ($150,000 for single filers, $300,000 for joint filers) will have their deduction phased out or fully disqualified. 
• Illegal Activity: Any amounts received for services that are illegal or criminal in nature do not qualify.  

Additional Resources:

• For more information, the IRS has published guidance and proposed regulations on the "No Tax on Tips" provisions on their official website.