If you work for tips or regularly clock overtime hours, there’s a new federal tax break that could put real money back in your pocket. As part of the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, Congress created two new deductions — commonly called “no tax on tips” and “no tax on overtime” — that apply to tax years 2025 through 2028.

These aren’t tax credits, and they’re not a change to how your paycheck is withheld. They’re new deductions you claim when you file, and understanding exactly how they work will help you avoid leaving money on the table (or overestimating your refund).

What Is “No Tax on Tips” and “No Tax on Overtime”

Both provisions work as an above-the-line deduction — meaning you can claim them whether you take the standard deduction or itemize. They reduce your taxable income, not your tax bill directly, and they only apply to federal income tax (not Social Security or Medicare payroll taxes, which are still withheld as usual).

They’re temporary: both deductions are currently scheduled to apply only to tax years 2025 through 2028, so this isn’t a permanent change to the tax code (at least not yet).

Who Qualifies for the Tips Deduction

The tips deduction applies to workers in occupations that customarily and regularly receive tips — think wait staff, bartenders, salon and spa workers, personal trainers, rideshare and delivery drivers, and similar service roles. A few key rules:

• Tips must be voluntary (not mandatory service charges) and properly reported as income
• The deduction is capped at $25,000 per year
• It phases out for higher earners: above $150,000 in Modified Adjusted Gross Income (MAGI) for single filers, or $300,000 for joint filers

If you’re a gig worker or self-employed and receive tips (say, through a delivery app), the same general framework applies, but how the income is reported matters — keep good records either way.

Who Qualifies for the Overtime Deduction

The overtime deduction is narrower than many people assume. It doesn’t apply to your entire overtime paycheck — it applies specifically to the extra “half” portion of time-and-a-half pay required under the Fair Labor Standards Act (FLSA). In other words, it’s the premium above your regular hourly rate, not the whole overtime wage.

Key details for the overtime deduction:

• Must be reported on your W-2, 1099, or another qualifying statement from your employer or payer
• Deduction cap: $12,500 for single filers, $25,000 for joint filers
• Same MAGI phase-out thresholds as the tips deduction
• Married filers must file a joint return to claim this deduction — filing separately disqualifies you

How to Claim These Deductions

The IRS created a new form, Schedule 1-A, specifically for taxpayers claiming the no-tax-on-tips, no-tax-on-overtime, no-tax-on-car-loan-interest, and no-tax-on-seniors deductions introduced by the OBBBA. You’ll use this schedule when you file your 2025 tax return (the one due in spring 2026), regardless of whether you take the standard deduction.

Before filing, double-check that your employer or payer is reporting your tips and overtime premium separately and accurately — that reporting is what the IRS will use to verify your claim, so mismatches can slow down processing or trigger a follow-up notice.

How This Affects Insurance and Benefits Planning

Because these are deductions that reduce your taxable income, they can also lower your MAGI — which matters for other income-tested programs. If you or a family member gets health coverage through the ACA Marketplace, a lower MAGI could mean a larger premium tax credit. It can also affect retirement account contribution limits and eligibility for other income-tested benefits, so it’s worth factoring into your overall tax and benefits planning, not just your refund estimate.

FAQ

Does this apply to self-employed or gig workers?
Generally yes, if the income qualifies as tips or overtime-type compensation and is properly reported, but self-employed taxpayers should confirm their specific situation with a tax professional, since reporting mechanics differ from traditional W-2 employment.

What if my employer doesn’t report tips or overtime separately?
Talk to your employer or payroll department as soon as possible. Without separate reporting of qualifying tips or the overtime premium, it may be difficult to substantiate your deduction if the IRS asks for documentation.

This article is for general informational purposes and is not tax or legal advice. For guidance specific to your situation, consult a licensed tax professional or refer to official IRS guidance.