In July, President Donald Trump completed the final step of bringing two campaign promises to fruition: no federal income taxes on tips or overtime.
Tax deductions for both types of income were included in the One Big Beautiful Bill Act — which only narrowly made it to the Oval Office. The House approved the legislation in a 218-214 vote. The Senate vote was split, with Vice President J.D. Vance breaking the tie.
These two tax deductions are just a small portion of the new law but could mean big news for some Americans’ tax returns.
Here’s how they work.
What the deductions have in common
Each deduction has its own rules and stipulations. But before we get to those distinctions, let’s look at what the deductions have in common.
Both new tax breaks:
- Are temporary, available only for tax years 2025 through 2028. This means only tips and overtime pay earned during those four years will be deductible.
- Are available to taxpayers who claim the standard deduction, not just those who itemize their tax deductions (which is only roughly 10% of taxpayers).
- Phase out for people with high incomes. Specifically, for those whose modified adjusted gross income exceeds $150,000 — or $300,000 for married couples filing jointly — the deductions will be less valuable or entirely unavailable.
- Require married people to file joint tax returns. This means married people who file separately are not eligible to deduct their tips or overtime pay.
- Require taxpayers to have a Social Security number. This means people who have an individual taxpayer identification number (ITIN), such as noncitizens, are not eligible to deduct their tips or overtime pay.
‘No tax on tips’
“No tax on tips” doesn’t necessarily mean all of a worker’s tip income will be exempt from taxes, but this deduction still has the potential to cover a large chunk of change.
It lets eligible workers deduct up to $25,000 per year in tip earnings. For the self-employed, though, the maximum value of the deduction can’t exceed their net income.
For workers to be eligible:
- They must have earned “voluntary cash or charged tips received from customers or through tip sharing,” according to the IRS.
- Their occupation must be listed by the IRS as “customarily and regularly” receiving tips. (The IRS is going to release a list of those occupations by Oct. 2.)
- Their employers or other payers must report their income, including tips, to the IRS, on an income statement like a Form W-2. Or, a worker must self-report their tips to the IRS on Form 4137.
Since the deduction and its reporting requirements are new, the law gives employers and other payers some leeway for the 2025 tax year. They can use “any reasonable method” to estimate how much tip income an employee earned in 2025.
‘No tax on overtime’
The “no” in “no tax on overtime” isn’t completely accurate, either. But this deduction can be applied to up to $12,500 per year — or $25,000 for married couples filing jointly — in qualified overtime pay.
The law defines qualified overtime pay as compensation that:
- Exceeds a worker’s regular rate of pay. In other words, taxpayers can only deduct overtime compensation if their overtime pay rate is higher than their regular pay rate.
- Is required by a federal law known as the Fair Labor Standards Act. So, overtime hours paid as a result of state laws or contractual provisions may not qualify.
- Is reported separately — meaning separate from a worker’s standard pay — on IRS Form W-2 or a similar income statement.
Additionally, the IRS notes that workers can only deduct the portion of their overtime pay that exceeds their regular pay rate — such as the “half” portion of “time-and-a-half” compensation.
As with the deduction for tip income, though, the law gives employers leeway for 2025, allowing them to reasonably estimate how much overtime pay an employee earned in 2025.
To learn about another temporary tax deduction created by the One Big Beautiful Bill Act, check out “The New Tax Deduction for Car Loans Isn’t As Great As It Sounds. Here’s How It Works.“
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