No Tax on Tips & Overtime, Explained
The One Big Beautiful Bill Act created two new deductions for 2025–2028 that let workers deduct tips and overtime pay. They're real money — but narrower than the headlines suggest. Here's exactly how they work.
For tax years 2025–2028 you can deduct up to $25,000 of qualified tips (IRC §224) and the FLSA premium half of overtime up to $12,500 single / $25,000 joint (IRC §225). Each deduction shrinks by $100 for every $1,000 of modified AGI over $150,000 ($300,000 joint). They cut federal income tax only — Social Security and Medicare (FICA) still apply, and you need an SSN on the return.
What actually counts
No Tax on Tips lets you deduct up to $25,000 of qualified tips — voluntary cash or charged tips from customers, or tip sharing. Anything above $25,000 stays fully taxable.
No Tax on Overtime is narrower than most people expect: it covers only the FLSA premium — the extra one-half of your regular rate for each overtime hour, not your whole overtime paycheck. The cap is $12,500 for single filers and $25,000 for joint filers.
Both are above-the-line deductions, so you claim them whether or not you itemize. Both require a valid Social Security Number on the return, and a married taxpayer must file jointly to claim either one.
The income phase-out most guides skip
Each deduction is reduced by $100 for every $1,000 of modified AGI above $150,000 (single) or $300,000 (joint). Because the caps differ, they disappear at different incomes: for a single filer, the overtime deduction is gone by $275,000 MAGI while tips survive until $400,000; for joint filers both end at $550,000.
So a higher earner can still deduct some tips after their overtime deduction has already phased out to zero.
FICA and state tax still apply
These deductions reduce federal income tax only. Social Security and Medicare (FICA) taxes are still withheld on every tip and overtime dollar — your pay does not become fully tax-free.
State income tax is separate. Nine states levy no wage income tax at all, so tips and overtime are already state-tax-free there; in the rest, whether the state follows the federal deduction depends on state law, so confirm with your state Department of Revenue.
Try Free Web Tools Mentioned in This Guide
No Tax on Tips & Overtime Calculator
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Frequently Asked Questions
Does 'no tax on tips' make my tips completely tax-free?↓
No. It's a deduction of up to $25,000 of tips from federal income tax, not an exemption. FICA taxes still apply to all tips, and amounts above $25,000 remain taxable.
Is my whole overtime paycheck deductible?↓
No — only the premium (the extra 'half' of time-and-a-half), capped at $12,500 single / $25,000 joint.
Which years does this cover?↓
Tax years 2025 through 2028, unless Congress extends the provisions.