Can You Gross Up “No Tax On Tips”?

Question:

Will Fannie Mae allow you to gross up tip income now that it is not taxable? The 2025 W-2 lists tip income separately, so you can discern what part of your income was from tips. If so, would you gross up 25%?

Answer:

Thanks for this great question. Here is the underlying challenge: Fannie Mae and Freddie Mac’s Selling Guide does not specifically address grossing up tip income under the new “No Tax on Tips” provision, and this is a genuinely gray area right now.

BUT…. logic suggests that the income could hypothetically be grossed up, but a lender may need to confirm with FNMA (or FHLMC) that this would be acceptable to them. The guides are written so that they just require the lender to confirm that an income source is nontaxable and don’t really offer much in the way of specifically calling out those types of income, like Social Security, Military BAH and BAS, Child Support income, and so on. They simply provide instructions in their guides on how they can gross up nontaxable income.

BUT…. and this is a big BUT….. I suspect it cannot be used for grossing up, and here is why:

The “No Tax on Tips” provision (from the One Big Beautiful Bill, effective tax years 2025–2028) is a deduction, not a true tax exemption. Eligible workers deduct up to $25,000 in qualifying tips on their 1040 as an above-the-line deduction. The income itself is still fully earned, and it just reduces federal taxable income at the time of filing. Tips remain subject to FICA (Social Security and Medicare) and are still ‘taxed’ at the paycheck level, and then when you file returns, you get a tax credit.

This is meaningfully different from income that is inherently tax-exempt at the source (like Social Security disability, VA benefits, child support, etc.).

And lastly: The No Tax on Tips deduction expires after 2028. Fannie Mae and Freddie Mac require that the income and its tax-exempt status are likely to continue. A 3-year sunset raises a legitimate continuance question

Sources:

Fannie Mae Selling Guide B3-3.1-01

Freddie Mac Section 5305.1

Subscribers can access our AI or our Nontaxable Income – All Agency Comparison Chart under “Guideline References” in “Charts & Checklists”.

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