The figure on Lydia Grosswendt’s laptop ticked upward as she entered months of tips from brunch shifts, where she mixed Bloody Marys for customers as early as 9:30 in the morning.
Grosswendt, a 24-year-old bartender at a Lower East Side Australian restaurant, was excited to file her taxes after she learned about new deductions for tipped workers from a co-worker.
“A calculator on the side showed how much you would owe or get back,” Grosswendt said. “I was just watching the number go up. It was pretty satisfying.”
Grosswendt is among the over 6 million filers who have claimed the “No Tax on Tips” deduction, a possible financial boost at a time where many Americans are feeling squeezed by the economy. The policy, part of the “One Big Beautiful Bill,” allows eligible workers to deduct up to $25,000 in tip income from their federal taxes, which phases out for income levels over $150,000. Workers with higher reported tips have seen some of the biggest returns, while lower-income employees and workers with little federal tax liability benefit far less.
For workers who do see benefits, rising gas prices, persistent inflation and the growing cost of living could gnaw at those gains. Economists at the Federal Reserve Bank of St. Louis estimated that higher fuel prices could eat away 10% to 15% of this year’s tax relief. Gas prices have climbed to an average of $4.53 a gallon, according to AAA, the highest level since early 2022.
The deduction is meaningful for those who qualify but applies to a relatively narrow segment of the population, said Andrew Lautz, director of tax policy at the Bipartisan Policy Center.
“The larger refunds help, but it’s happening under a broader macroeconomic environment where prices are rising and there’s pressure on a lot of families’ budgets and household budgets,” Lautz said. “People are justifiably upset about that.”
For workers who rely heavily on tips, the policy has had an immediate effect. Tips account for a fifth of the average restaurant worker’s income, according to 2024 payroll data from Square.
Grosswendt reported about $18,700 in tips across three service jobs in 2025, most of it from bartending. Her total refund reached $4,707, up from $250 the previous year.
She spent part of the refund on household goods, like storage bins, blinds and sheets, and plans to put aside the rest in a high-yield savings account. Before receiving the refund, she said she felt squeezed, monitoring her grocery and discretionary spending closely.
“I can breathe a little for sure,” she said. “I had about $2,000 in my bank account before, so it tripled my net worth.”
Yet, the structure of the deduction limits its reach. The policy reduces taxable income rather than offering a refundable credit, so workers who owe little or no federal income tax see limited gains, said Garrett Watson, director of policy analysis at the Tax Foundation.
“The benefits for working-class, lower-income folks in the tip service sector is actually fairly limited to non-existent,” Watson said.
Many lower-income workers are already covered by the standard deduction and existing credits, leaving little additional tax to offset. Higher earners in the industry, like servers in fine dining establishments making $80,000 or more, are likely to gain more, especially if they qualify for other deductions like overtime.
Additional financial pressures, like health care, further diminish the policy’s impact.
Tipped workers are also unlikely to receive health insurance through their employers, said Corey Husak, director of tax policy for the Center for American Progress.
“They’re very likely to rely on things like Medicaid and the Affordable Care Act, and those have all been cut over the past year under the Trump administration,” Husak said.
Even claiming the deduction may be a complicated process for some workers. While some employees can see total tips reported on their W-2, independent contractors may need to calculate their tips themselves by tracking receipts or maintaining daily logs.
Filers without tip or overtime income were more likely to report their filing experience was “about the same” compared to respondents with any tip/OT income, according to a poll of tax filers by Bipartisan Policy Center.
“In some cases your employer may not have the systems in place to provide you exactly the information you need to confidently claim all of the tips that you received,” Lautz said.
Abby Ramirez works part time at a taproom in Elk Grove, California, serving craft beers, seltzers and bar food. Most weekends, she takes home around $150 in tips on a busy night, though a slow weekday morning shift brings in closer to $60. While her federal refund was higher than usual at $814, she owed the state $1549, in part because California has not adopted the deduction at the state level.
Ramirez said rising gas prices means she does not leave the house unless she absolutely needs to. Filling the tank of her Honda Civic used to cost around $45, but recently climbed to $68.
“It makes my commute to school and work harder,” Ramirez said. “It also makes customers not want to come in because then they have to drive, so in a way I get less tips.”
