The “One Big Beautiful Bill Act” ( P.L. 119-21) was signed into law on July 4, 2025. Included in the Bill are two new deductions for American workers that are retroactive to January 1, 2025. The “No Tax on Tips” and “No Tax on Overtime” provisions are designed to provide tax savings to the American worker.
No Tax on Tips (2025–2028)
This provision allows eligible individuals to deduct up to $25,000 annually in qualified tips from their taxable income. Qualified tips include voluntary cash or charged tips received from customers or through tip-sharing arrangements.
Eligibility Requirements:
- Must work in an occupation listed by the IRS as customarily receiving tips as of December 31, 2024. The IRS will publish this list by October 2, 2025.
- For self-employed individuals, the deduction cannot exceed net income from the business in which the tips were earned.
- The deduction begins to phase out for taxpayers with Modified Adjusted Gross Income (MAGI) over $150,000 ($300,000 for joint filers).
- Not available to employees or self-employed individuals involved in Specified Service Trades or Businesses (SSTBs) under section 199A.
- Taxpayers must include their Social Security number on their tax return and file jointly if married.
Important Notes: Both itemizers and non-itemizers can claim this deduction, and employers/payors will need to furnish tip-related statements to the IRS and the employee. Forms W-2, 1099, and other payroll return forms will not be updated for tax year 2025. The IRS is working on new guidance and updated forms for tax year 2026.
No Tax on Overtime (2025–2028)
Under this deduction, individuals may deduct the overtime pay they receive beyond their regular rate of pay, such as the “half” portion in time-and-a-half compensation. The maximum annual deduction is $12,500 ($25,000 for joint filers).
Deduction Details:
- Applies only to compensation reported on a W-2, 1099, or similar statements.
- The deduction begins to phase out for taxpayers with Modified Adjusted Gross Income (MAGI) over $150,000 ($300,000 for joint filers).
- Taxpayers must include their Social Security number on their tax return and file jointly if married.
Employers are required to report total qualified overtime compensation to the IRS and provide statements to employees. The overtime deduction is available for both itemizing and non-itemizing taxpayers.
Transition Relief and Next Steps
For workers in industries where tipping or overtime is common, these deductions represent a significant opportunity to reduce taxable income.
Stay tuned for updates as the IRS publishes more detailed guidance to support taxpayers and employers adjusting to these new reporting requirements ahead of the 2025 tax season. If you have questions about how to prepare or ensure compliance, our team is here to help.