Month: November 2025

The Internal Revenue Service have issued guidance for workers eligible to claim the deduction for tips and for overtime compensation for tax year 2025. Specifically, the IRS clarified for workers how to determine the amount of their deduction without receiving a separate accounting from their employer for cash tips or qualified overtime on information returns such as Form W-2 or Form 1099, as those forms remain unchanged for the current tax year. It also provides transition relief to workers who receive tips in the course of a specified service trade or business.

No Tax on Tips

Under the One, Big, Beautiful Bill, workers may be eligible for new deductions for tax years 2025 through 2028 if they received qualified tips. For tipped workers, the maximum annual deduction is $25,000, which phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

It is estimated that there are about 6 million workers who report tipped wages.

Examples of how the rules work for tipped employees

The IRS provided some examples to illustrate various situations tipped employees might encounter; below are abridged versions of some of those examples.

Waiter with reported tips in box 7, Form W-2

Ann is a restaurant server whose 2025 Form W-2, box 7 reports $18,000 of social security tips. Ann did not report any additional tips on Form 4137. Ann may use $18,000 in determining the amount of her qualified tips for tax year 2025.

Bartender with additional reported tips on Form 4137

Bob is a bartender who reports $20,000 in tips to his employer during the 2025 tax year on Forms 4070 and reports $4,000 of unreported tips on Form 4137, line 4. Bob’s 2025 Form W-2 reports $200,000 in box 1 and $15,000 in box 7. Bob may use either the $15,000 in box 7 of the Form W-2, or the $20,000 of tips reported to Bob’s employer on Forms 4070 in determining the amount of qualified tips for tax year 2025. Regardless of the option chosen, Bob may also include the $4,000 of unreported tips from Form 4137, line 4 in determining the amount of qualified tips.

Self-employed travel guide

Doug is a self-employed travel guide who operates as a sole proprietor. In 2025, Doug receives $7,000 in tips from customers paid through a third-party settlement organization (TPSO). For tax year 2025, Doug receives a Form 1099-K from the TPSO showing $55,000 of total payments. The Form 1099-K does not separately identify the tips. However, Doug keeps a log of each tour that shows the date, customer, and tip amount received. Because Doug has daily tip logs substantiating the $7,000 tip amount, he may use the $7,000 tip amount in determining qualified tips for tax year 2025.

No Tax on Overtime

For tax years 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay (generally, the “half” portion of “time-and-a-half” compensation) that is required by the Fair Labor Standards Act and reported on a Form W-2, Form 1099, or other statement furnished to the individual.

• Maximum annual deduction is $12,500 ($25,000 for joint filers).
• Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

The deduction is available for both itemizing and non-itemizing taxpayers.

Certain employees are exempt from the rules on overtime

Generally, the FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half their regular rate of pay for all hours worked over 40 in a workweek. However, the law provides for certain exemptions.

The IRS provided a series of examples illustrating situations that workers who receive qualified overtime might encounter. The IRS guidance does not affect any rights or responsibilities regarding tips or overtime compensation under the FLSA. Below are abridged versions of some of those examples.

Overtime examples

Andrew works overtime during 2025, and he receives a payroll statement from his employer that shows $5,000 as the “overtime premium” that he was paid during 2025. Andrew may include $5,000 (the FLSA overtime premium) to determine the amount of qualified overtime compensation received in tax year 2025.

Assume the same facts as in the first example except that Andrew’s payroll statement shows a total “overtime” amount of $15,000, which is the total amount Andrew was paid for working overtime (the FLSA overtime premium combined with the portion of his regular wages). Andrew may include the $5,000 FLSA overtime premium, computed by dividing $15,000 by 3 in determining the amount of qualified overtime compensation for 2025.

Brad’s employer has a practice of paying overtime at a rate of two times an employee’s regular rate of pay, and Brad was paid $20,000 in overtime pay during 2025. Brad’s last pay stub for 2025 shows “overtime” of $20,000 paid in 2025. For purposes of determining the amount of qualified overtime compensation received in tax year 2025, Brad may include $5,000 ($20,000 divided by 4).

Carol is a covered, nonexempt employee under the FLSA and works in law enforcement and is paid $15,000 of overtime pay on a “work period” basis of 14 days that complies with the FLSA. For purposes of determining the amount of qualified overtime compensation received in tax year 2025, Carol may include $5,000 ($15,000 divided by 3).

Diane works for a State or local government agency that gives compensatory time at a rate of one and one-half hours for each overtime hour worked. In 2025, Diane was paid wages of $4,500 for compensatory time off based on that overtime. To determine the amount of qualified overtime compensation received in tax year 2025, Diane may include $1,500, one-third of these wages, for purposes of determining the qualified overtime compensation deduction.

The Internal Revenue Service has announced that the amount that individuals can contribute to their 401(k) plans, 403(b) plans, governmental 457 plans, and the federal government’s Thrift Savings Plan plans in 2026 has increased to $24,500, up from $23,500 for 2025.

The limit on annual contributions to an IRA is increased to $7,500 from $7,000. The IRA catch‑up contribution limit for individuals aged 50 and over was amended under the SECURE 2.0 Act of 2022 (SECURE 2.0) to include an annual cost‑of‑living adjustment is increased to $1,100, up from $1,000 for 2025.

The catch-up contribution limit that generally applies for employees aged 50 and over who participate in most 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan is increased to $8,000, up from $7,500 for 2025. Therefore, participants in most 401(k), 403(b), governmental 457 plans and the federal government’s Thrift Savings Plan who are 50 and older generally can contribute up to $32,500 each year, starting in 2026. Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in these plans. For 2026, this higher catch-up contribution limit remains $11,250 instead of the $8,000 noted above.

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the Saver’s Credit all increased for 2026.

You can deduct contributions to a traditional IRA if you meet certain conditions. If during the year either you or your spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither you nor your spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase‑out ranges for 2026:

• For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $81,000 and $91,000, up from between $79,000 and $89,000 for 2025.
• For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $129,000 and $149,000, up from between $126,000 and $146,000 for 2025.
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $242,000 and $252,000, up from between $236,000 and $246,000 for 2025.
• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.

Other phase-out ranges and limitations

The IRS also announced limitations for 2026 for Roth IRAs, the Saver’s Credit and SIMPLE retirement accounts.

• The income phase-out range for people making contributions to a Roth IRA is increased to between $153,000 and $168,000 for singles and heads of household, up from between $150,000 and $165,000 for 2025. For married couples filing jointly, the income phase-out range is increased to between $242,000 and $252,000, up from between $236,000 and $246,000 for 2025. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
• The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $80,500 for married couples filing jointly, up from $79,000 for 2025; $60,375 for heads of household, up from $59,250 for 2025; and $40,250 for singles and married individuals filing separately, up from $39,500 for 2025.
• The amount individuals can generally contribute to their SIMPLE retirement accounts is increased to $17,000, up from $16,500 for 2025. Pursuant to a change made in SECURE 2.0, individuals can contribute a higher amount to certain applicable SIMPLE retirement accounts. For 2026, this higher amount is increased to $18,100, up from $17,600 for 2025.
• The catch-up contribution limit that generally applies for employees aged 50 and over who participate in most SIMPLE plans is increased to $4,000, up from $3,500 for 2025. Under a change made in SECURE 2.0, a different catch-up limit applies for employees aged 50 and over who participate in certain applicable SIMPLE plans, which remains $3,850. Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in SIMPLE plans, which remains $5,250.

No tax on overtime

• Starting January 1, 2025, a designated amount of qualifying overtime pay will be exempt from federal income tax under the One Big Beautiful Bill Act (OBBBA).
• You can deduct up to $12,500 (for most filers) or $25,000 (Married Filing Jointly) in overtime pay from your taxable income.
• The tax benefit phases out for higher earners, starting at $150,000 (Single) or $300,000 (Married Filing Jointly).
• You must be a non-exempt W-2 employee and your overtime must meet federal labor standards.

No tax on tips

• Deduction, Not Elimination: Tips are still considered income and remain subject to Social Security and Medicare payroll taxes. The new law allows eligible workers to claim an above-the-line deduction of up to $25,000 in reported tops from their federal taxable income.
• Eligibility Requirements:
  • Qualifying Occupations: The deduction is limited to specific occupations that customarily and regularly received tips before 2025 (e.g., waiters, bartenders, housekeepers, certain drivers). The IRS published a list of 68 eligible job categories in September 2025.
  • Income Limits: The deduction amount begins to phase out for taxpayers with a modified adjusted gross income (MAGI) over $150,000 (single filers) or $300,000 (married couples filing jointly).
  • Reporting: Only tips that are reported to the employer (or reported by the taxpayer on IRS Form 4137) quality for the deduction.
• Types of Tips Covered: “Qualified tips” include cash, checks, and electronic payments (credit card, payment apps, etc.) that are given voluntarily by a customer. Mandatory service charges do not qualify.
• Timeframe: The deduction is a temporary provision, applying to tax years 2025 through 2028.
• State and Local Taxes: This law only affects federal income tax. Tips may still be subject to state and local income taxes depending on where the worker lives.

Senior deduction

Under the act, individuals who are age 65 and older may claim a deduction of $6,000 in 2025 through 2028. The $6,000 amount is per person — so married couples can claim a $12,000 deduction if they both qualify. However, the deduction phases out for taxpayers with modified adjusted gross income (MAGI) over $75,000 ($150,000 for joint filers). To qualify, a taxpayer must turn 65 on or before the last day of the tax year. This new deduction is in addition to the current additional standard deduction for seniors of $1,600, or $2,000 if the individual is unmarried and not a surviving spouse.

Because the extra senior deduction was created as a substitute for a “no tax on Social Security” promise that could not be adopted under the budget reconciliation rules that governed the passage of the act, clients may think they have to be receiving Social Security benefits to take the deduction, but they do not. Individuals age 65 and older can claim the deduction even if they haven’t started taking Social Security. On the other hand, individuals between the ages of 62 and 64 are not eligible for the deduction, even if they have started receiving Social Security benefits.

SALT cap

For 2025, the limit on the federal deduction for state and local taxes (the SALT cap) increases to $40,000 ($20,000 for married taxpayers filing separately) from the previous $10,000. The amount of the deduction available to a taxpayer is reduced by 30% of the amount the taxpayer’s MAGI exceeds $500,000 ($250,000 for married taxpayers filing separately), but the phaseout stops when the deduction reaches $10,000 ($5,000 for married taxpayers filing separately). The act did not limit the various workarounds that states have enacted and taxpayers are currently using to avoid the SALT cap.

Car loan interest

The act allows individuals to deduct up to $10,000 in interest paid on a loan used to purchase a qualified vehicle, but various restrictions embedded in the provision may prove a trap for the unwary client (including a phaseout beginning at $100,000 of MAGI ($200,000 for married taxpayers filing jointly)).

To qualify for the deduction, the interest must be paid on a loan that is originated after Dec. 31, 2024; used to purchase a vehicle, the original use of which starts with the taxpayer (used vehicles do not qualify); for a personal-use vehicle (not for business or commercial use); and secured by a first lien on the vehicle. A qualified vehicle is a car, minivan, van, SUV, pickup truck, or motorcycle with a gross vehicle weight rating of less than 14,000 pounds that has undergone final assembly in the United States, among other requirements.

Finally, for many eligible clients, the interest deduction will not outlast the car loan; the provision is set to expire after 2028.

Child tax credit

The nonrefundable child tax credit was permanently increased to $2,200 per child. The additional child tax credit (the refundable child tax credit) of $1,400, adjusted for inflation, was also made permanent. The additional child tax credit after adjustment for inflation is $1,700 for 2025. The credit starts to phase out at MAGI of $200,000 ($400,000 in the case of a joint return). There is also a $500 nonrefundable credit available for each dependent of the taxpayer other than a qualifying child. As formerly, Social Security numbers must be shown on the return for each child for whom the credit is being claimed.

Bonus depreciation

The allowance is increased to 100% for property acquired and placed in service on or after Jan. 19, 2025, as well as for specified plants planted or grafted on or after Jan. 19, 2025. Property placed in service in the first 18 days of 2025 is subject to the former, reduced rate of 40% in effect before the enactment of the act.

Sec. 179

For property placed in service in 2025, the maximum amount a taxpayer may expense under Sec. 179 is $2.5 million, reduced by the amount by which the cost of the qualifying property exceeds $4 million. The $2.5 million and $4 million amounts are adjusted for inflation for tax years beginning after 2025.

R&D

The act allows taxpayers to immediately deduct domestic research or experimental expenditures paid or incurred in tax years beginning after Dec. 31, 2024. However, research or experimental expenditures attributable to research that is conducted outside the United States will continue to be required to be capitalized and amortized over 15 years under Sec. 174.

Small business taxpayers with average annual gross receipts of $31 million or less (other than a tax shelter) can retroactively apply this change to tax years beginning after Dec. 31, 2021. In addition, all taxpayers that made domestic research or experimental expenditures in tax years beginning after Dec. 31, 2021, and before Jan. 1, 2025, can elect to accelerate the remaining unamortized deductions for those expenditures over a one- or two-year period.

Sec. 163(j)

The act changed the definition of adjusted taxable income (ATI) under Sec. 163(j) for tax years beginning after Dec. 31, 2024, permanently excluding depreciation, depletion, and amortization from the computation of ATI. The act also amended the definition of “motor vehicle” to allow interest on floor plan financing for certain trailers and campers to be deductible.

Small business stock

The act modified the Sec. 1202 exclusion for gain from qualified small business stock (QSBS) by providing a tiered gain exclusion for QSBS acquired after July 4, 2025. For QSBS acquired after that date and held for three years, 50% of the gain will be excluded from gross income. If the QSBS is held for four years, the exclusion rises to 75%. If the QSBS is held for five years or more, 100% of the gain will be excluded from income.

Farmland sales

The act created a new Sec. 1062 that allows income tax resulting from the sale of qualified farmland property to a qualified farmer to be paid in four installments. The new section applies to sales or exchanges in tax years beginning after July 4, 2025. (So, for calendar-year taxpayers, it will not apply until 2026.)