Can I Claim the Tax Deduction on Tips as an Expat?

Working as a bartender in Dublin or serving tables in Barcelona? You’ve probably heard about the new tax deduction on tips and wondered if it applies to you. The IRS estimates that about 6 million workers report tipped wages, and while the One Big Beautiful Bill Act created a valuable deduction for service workers in the U.S., most American expats working abroad won’t qualify for this specific benefit.

The relief? The Foreign Earned Income Exclusion provides far better protection for expats in service industries, allowing you to exclude up to $130,000 of foreign-earned income (including all your tips) from U.S. taxation for the 2025 tax year. This means most American servers, bartenders, and hospitality workers abroad will owe $0 in U.S. taxes without needing the tips deduction at all.

Quick Facts: No Tax on Tips (U.S. Workers)

Tax years: 2025–2028
Max deduction: $25,000 in qualified tips
Applies to: Workers in IRS-listed tipped occupations
Income limits: Phase-out starts at $150,000 ($300,000 for joint filers)
Requirement: Tips must be properly reported on U.S. tax forms

If you’re an American working outside the U.S., your situation is different. Here’s why most expats won’t qualify for this tips deduction and why the Foreign Earned Income Exclusion usually gives you better tax relief anyway.

What Is the New Tax Deduction on Tips?

The One Big Beautiful Bill Act (OBBB), signed into law in July 2025 as part of broader tax reform, created a temporary deduction for qualified tips received during tax years 2025 through 2028. This legislation also permanently extended the Tax Cuts and Jobs Act and increased the Foreign Earned Income Exclusion to $130,000 for the 2025 tax year.

Service workers in the U.S. can deduct up to $25,000 annually in tips, with the deduction phasing out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

Qualifying occupations include restaurant servers, bartenders, hotel staff, hairdressers, taxi drivers, and similar service positions that customarily and regularly received tips on or before December 31, 2024.

Recent guidance: On November 21, 2025, the IRS released Notice 2025-69, providing detailed guidance for individual taxpayers on how to calculate and claim the tips deduction for the 2025 tax year. Since the 2025 Form W-2 and Form 1099 won’t be updated to separately report tips until 2026, the notice explains alternative methods employees can use to determine their qualified tip amounts.

The critical requirement: Tips must be reported on information returns such as Form W-2 or Form 1099, and employers must comply with IRS tip reporting requirements.

Not sure whether you can claim the new tips deduction as an expat?

Get expert help to see what applies to you and how to lower your U.S. taxes.

Does the Fair Labor Standards Act (FLSA) Affect the New Tip or Overtime Deductions for Expats?

The One Big Beautiful Bill Act created two separate tax deductions for service workers beginning in the 2025 tax year:

A tips deduction for qualified cash tips (up to $25,000)
An overtime deduction for qualified overtime pay

These two deductions operate differently when it comes to the Fair Labor Standards Act (FLSA):

Tips Deduction: Not Tied to FLSA Coverage

To claim the tips deduction, the IRS requires that:

Your tips come from an occupation that customarily and regularly received tips on or before December 31, 2024
Your tips are properly reported on U.S. tax forms (W-2, certain 1099s, or Form 4137)
The employer/payor tracks and reports tips separately (and beginning in 2026, reports the tipped occupation on information returns)

Because most expats working for foreign employers do not receive U.S. W-2s or 1099s and do not have tips reported under U.S. payroll rules, the deduction is typically not available even though the tips are still taxable U.S. income and must be reported.

Overtime Deduction: Is Tied to FLSA Coverage

The separate overtime deduction in OBBB is linked directly to section 7 of the Fair Labor Standards Act.

The FLSA does not apply to work performed entirely in a foreign country, which means overtime worked abroad generally cannot qualify for the new overtime deduction.

What This Means for Expats

The tips deduction isn’t usually available because foreign employers don’t provide the U.S. reporting required to calculate and substantiate “qualified tips”
The overtime deduction almost never applies because it is tied to the FLSA, which does not cover work performed abroad
Most expat service workers get far greater benefit by using the Foreign Earned Income Exclusion, which excludes wages and tips from U.S. taxation without requiring special tip documentation from a foreign employer

Real-world example: Sarah works as a server in London earning £35,000 annually (including tips). Her UK employer provides pay statements under UK law but doesn’t issue U.S. W-2 forms or track tips separately for IRS purposes. Even though Sarah must report her worldwide income to the IRS, she likely won’t qualify for the tips deduction because she lacks the required U.S. tax form documentation. However, using the Foreign Earned Income Exclusion, she can exclude her entire income and owe $0 in U.S. taxes without needing special tip documentation.

How Can I Exclude My Tips from U.S. Taxes?

The Foreign Earned Income Exclusion was specifically designed for Americans working abroad and provides far superior tax relief for service workers.

Why FEIE works better: The FEIE excludes up to $130,000 of your entire foreign-earned income (including both wages and tips) from U.S. taxation without requiring detailed U.S.-compliant tip documentation from your foreign employer.

To qualify, you must meet one of two tests:

Physical Presence Test: Be physically present in a foreign country or countries for at least 330 full days during any 12-month period. This works perfectly for servers and bartenders living abroad.

Bona Fide Residence Test: Establish genuine residency in a foreign country for a full calendar year (January 1 to December 31). This works well for expats who’ve made another country their permanent home.

FEIE vs. tips deduction example:

Maria bartends in Dublin earning $45,000 annually (including $12,000 in tips). She pays $8,500 in Irish taxes and qualifies under the Physical Presence Test.

With tips deduction (if it applied): Deduct $12,000 in tips, leaving $33,000 taxable = approximately $2,500 owed in U.S. taxes
With FEIE (what actually works): Excludes entire $45,000 income = $0 owed in U.S. taxes

Maria saves $2,500 using FEIE without needing special tip documentation.

Do I Need to Report My Tips to the IRS?

Yes. Even though you’ll likely owe $0 after applying FEIE, you must report all worldwide income, including tips.

How to Report Tips as an Expat:

Convert foreign currency tips to USD
Report total income (wages plus tips) on your U.S. tax return
File Form 2555 to claim the Foreign Earned Income Exclusion
FEIE excludes your income, reducing your U.S. tax liability to $0

You must file Form 2555 to claim the exclusion. Not filing means no FEIE benefits and potential penalties.

Should I Use FEIE or Foreign Tax Credit?

For service workers abroad, the choice depends on where you work and how much you earn.

Use FEIE when:

You work in low-tax or no-tax countries (UAE, Qatar, Monaco)
Your total income is below $130,000
You want to simplify your tax filing process

Use Foreign Tax Credit when:

You work in high-tax countries (Germany, France, the UK, Australia)
Your income exceeds $130,000
You’ve paid substantial foreign taxes

For most service workers, the FEIE provides the simplest and most effective tax relief, as hospitality wages typically fall well below the $130,000 exclusion limit.

What About Other Trump Tax Policy Changes for Expats?

The One Big Beautiful Bill Act that created the tips deduction also brought significant benefits for American expats:

FEIE Increased to $130,000: For the 2025 tax year, the Foreign Earned Income Exclusion rose from $126,500 to $130,000, with further increases to $132,900 for the 2026 tax year.

Tax Cuts and Jobs Act Made Permanent: The TCJA provisions, which were set to expire on December 31, 2025, have been made permanent, providing long-term tax rate certainty.

Double Taxation Relief Proposed: President Trump has expressed support for eliminating double taxation for Americans abroad, with legislation such as the Tax Fairness for Americans Abroad Act gaining momentum in Congress.

Section 899 Removed: The “revenge tax” provision that penalized certain foreign investments was eliminated.

While the tips deduction itself doesn’t benefit most expats, the OBBB Act’s increased FEIE and other provisions deliver substantial tax relief for Americans working abroad.

How Greenback Helps Service Workers Abroad

Greenback is an American company founded in 2009 by U.S. expats for expats. Many of our CPAs and Enrolled Agents are expats themselves living in 14 time zones, so they experience firsthand the challenges of living abroad and have the knowledge and patience to help you navigate the complicated U.S. tax system.

No matter how late, messy, or complex your return may be, we can help. You’ll have peace of mind knowing your taxes were done right using strategies designed specifically for Americans abroad.

If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.

Want peace of mind that your tips and wages are reported accurately?

Let our team prepare your return and ensure you get full expat tax benefits.

This article provides general information for educational purposes. Individual tax situations vary, and you should consult with a qualified tax professional for advice specific to your circumstances. Tax laws and regulations change frequently, and the information in this article reflects current law as of the publication date.

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