No Tax on Tips and Overtime: Who Qualifies for the New Deductions
Legislation passed in 2025 created two new federal deductions, one for tip income and one for overtime pay, for tax years 2025 through 2028. They don't make tips or overtime completely tax-free, but they can lower your income tax noticeably. Here's how they work.
By the Enrolled Agents and CPAs at A&W Tax Services · Updated
The tips deduction
- Deduct up to $25,000 a year of qualified tips
- For workers in occupations that customarily received tips before 2025, such as servers, bartenders, hairstylists and delivery drivers, under a list the Treasury published
- Covers cash and card tips reported to your employer, or reported on your return if you're self-employed
- Available whether you itemize or take the standard deduction
The overtime deduction
- Deduct up to $12,500 a year of qualified overtime pay, or $25,000 on a joint return
- Only the extra premium counts: the "half" in time-and-a-half, not your regular hourly pay for those hours
- Applies to overtime required by the Fair Labor Standards Act for hours over 40 in a workweek
- Available whether you itemize or take the standard deduction
Income limits and other rules
Both deductions shrink once modified adjusted gross income passes $150,000, or $300,000 on a joint return. You need a valid Social Security number, and married couples must file jointly to claim them. The deductions reduce federal income tax only. Social Security and Medicare taxes still apply to tips and overtime, and Texas has no state income tax to reduce.
Records to keep
- Pay stubs and your W-2, which should show reported tips and overtime separately
- A daily tip log if you receive cash tips
- Time records showing hours over 40 in each workweek
- For self-employed workers, records of tips received through apps or cards
Get it right the first time
These are new rules, and employer reporting is still catching up. If your W-2 doesn't separate overtime premium or tips clearly, the amount may need to be calculated from your pay records. A tax professional can work out what qualifies and make sure the deduction is documented.