The tax law signed on July 4, 2025, often called the One Big Beautiful Bill Act, created two new federal income tax deductions widely described as “no tax on tips” and “no tax on overtime”. They do not make tips or overtime completely tax-free, and they come with limits. Here is what they actually do.
Key Takeaways
- Both deductions apply for tax years 2025 through 2028.
- Qualified tips: deduction of up to $25,000 a year.
- Qualified overtime: deduction of up to $12,500 a year, or $25,000 for joint filers, for the premium portion of overtime pay.
- Both phase out for higher incomes, starting at $150,000 of modified adjusted gross income, or $300,000 for joint filers.
- Social Security and Medicare payroll taxes still apply, and state taxes may differ.
These are deductions, not exemptions
The deductions reduce taxable income for federal income tax. They are available whether or not you itemise. You still owe Social Security and Medicare taxes on tips and overtime, and states set their own rules.
Qualified tips
- Up to $25,000 a year can be deducted.
- Tips must be voluntary payments from customers, and include cash and charged tips and tips received through tip-sharing.
- They must be received in an occupation that customarily and regularly received tips before 2025. The Treasury Department published a list of qualifying occupations.
- Self-employed individuals in qualifying occupations can also claim the deduction, subject to rules.
- Married couples must file jointly to claim it.
Qualified overtime
- Up to $12,500 a year, or $25,000 for joint filers.
- Only the premium portion counts: the “half” in time-and-a-half required under the Fair Labor Standards Act. If your regular rate is $20 an hour and you earn $30 an hour for overtime, $10 an hour is the qualified amount.
- Overtime paid under a union contract or state law above federal requirements may not all qualify; the deduction is tied to FLSA-required overtime.
Income phase-outs
Both deductions are reduced by $100 for every $1,000 of modified adjusted gross income above $150,000, or $300,000 for joint filers.
How it is reported
Employers are required to report qualified tips and overtime to workers. For 2025, the IRS provided transition relief because forms were not yet updated, and workers could use pay stubs and other records. Keep your own records of tips and overtime pay.
Social Security number required
To claim either deduction, you need a valid Social Security number, and joint filers must file together.
Example
A server earning $45,000 in wages and $18,000 in tips, single, with income below the phase-out, could deduct the $18,000 of qualified tips, reducing federal taxable income. At a 12% marginal rate, that saves about $2,160 in federal income tax.
What it does not do
- It does not reduce payroll taxes.
- It does not apply after 2028 unless Congress extends it.
- It does not apply to tips received in occupations not on the qualifying list.
Frequently Asked Questions
Do I need to itemise? No. These deductions are available whether you take the standard deduction or itemise.
Are tips from a tip pool included? Tips received through tip-sharing arrangements can qualify.
Do state taxes follow? Not necessarily. Check your state’s rules.
The bottom line
Keep records of tips and overtime, check whether your occupation and income qualify, and remember the deductions apply only to federal income tax through 2028.
