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.

This article carries no official authority, and its contents should not be acted upon without professional advice. For more information about this topic, please contact our office.