IRS Issues Updated Guidance on Overtime Deductions and Tax-Free Tips
Former Reagan economist Art Laffer and former World Bank President David Malpass assess the economy under the Trump administration on ‘Kudlow.’
The IRS has recently unveiled its guidance regarding the “no tax on tips” and “no tax on overtime” provisions of the One Big Beautiful Bill Act (OBBBA), specifically for workers eligible to claim these deductions for the 2025 tax year.
President Donald Trump signed the OBBBA into law in July, following a party-line vote by Republican majorities in Congress. This significant legislation includes provisions aimed at alleviating tax burdens on workers, particularly those who rely on tips and overtime pay.
According to the IRS notice, taxpayers eligible for the tipped and overtime income deductions will need to calculate these amounts separately this year. This is due to the fact that Form W-2 and Form 1099 will not reflect income from tips and overtime for the 2025 tax year.
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The IRS released guidance for new tax deductions covering eligible income from tips and overtime. (Lindsey Nicholson/UCG/Universal Images Group via Getty Images) / Getty Images)
Taxpayers can refer to examples in the IRS guidance that illustrates how the deductions for tipped income and overtime work based on reported or unreported income.
Under the OBBBA, workers receiving qualified tips can deduct up to an annual maximum of $25,000. However, this deduction phases out for taxpayers with a modified adjusted gross income exceeding $150,000 (or $300,000 for joint filers).
The IRS estimates that approximately 6 million workers report tipped wages, and the tipped income deduction will be in effect for tax years 2025 to 2028.
Eligible workers can deduct up to $25,000 in tips. (Lindsey Nicholson/UCG/Universal Images Group via Getty Images) / Getty Images)
The “no tax on overtime” provision allows individuals receiving eligible overtime compensation to deduct the pay that exceeds their regular pay. This typically refers to the “half” portion of “time and a half” overtime pay, which is reported on a Form W-2, Form 1099, or other specified statements.
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The maximum annual deduction for overtime is set at $12,500 (or $25,000 for joint filers), with the deduction phasing out for taxpayers with a modified adjusted gross income over $150,000 (or $300,000 for joint filers). Importantly, this deduction is available to both itemizing and non-itemizing taxpayers.
The Fair Labor Standards Act mandates that most employees receive at least the federal minimum wage for all hours worked, along with overtime pay of at least time and one-half for hours exceeding 40 in a week.
President Donald Trump made “no tax on tips and overtime” a key part of his economic agenda that was included in the OBBBA. (Win McNamee/Getty Images)
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It’s important to note that some employees are exempt from overtime rules, including those who earn a salary of at least $1,128 per week or $58,656 annually, as well as workers in specific occupational roles.
The IRS is currently updating income tax forms and instructions to assist taxpayers in claiming these new deductions during the upcoming filing season.
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The start date for the filing season for the 2025 tax year has yet to be announced, although it has typically begun in late January in recent years.
Former Reagan economist Art Laffer and former World Bank President David Malpass assess the economy under the Trump administration on ‘Kudlow.’
The IRS has recently unveiled its guidance regarding the “no tax on tips” and “no tax on overtime” provisions of the One Big Beautiful Bill Act (OBBBA), specifically for workers eligible to claim these deductions for the 2025 tax year.
President Donald Trump signed the OBBBA into law in July, following a party-line vote by Republican majorities in Congress. This significant legislation includes provisions aimed at alleviating tax burdens on workers, particularly those who rely on tips and overtime pay.
According to the IRS notice, taxpayers eligible for the tipped and overtime income deductions will need to calculate these amounts separately this year. This is due to the fact that Form W-2 and Form 1099 will not reflect income from tips and overtime for the 2025 tax year.
IRS REVEALS UPDATED RETIREMENT CONTRIBUTION LIMITS FOR 2026
The IRS released guidance for new tax deductions covering eligible income from tips and overtime. (Lindsey Nicholson/UCG/Universal Images Group via Getty Images) / Getty Images)
Taxpayers can refer to examples in the IRS guidance that illustrates how the deductions for tipped income and overtime work based on reported or unreported income.
Under the OBBBA, workers receiving qualified tips can deduct up to an annual maximum of $25,000. However, this deduction phases out for taxpayers with a modified adjusted gross income exceeding $150,000 (or $300,000 for joint filers).
The IRS estimates that approximately 6 million workers report tipped wages, and the tipped income deduction will be in effect for tax years 2025 to 2028.
Eligible workers can deduct up to $25,000 in tips. (Lindsey Nicholson/UCG/Universal Images Group via Getty Images) / Getty Images)
The “no tax on overtime” provision allows individuals receiving eligible overtime compensation to deduct the pay that exceeds their regular pay. This typically refers to the “half” portion of “time and a half” overtime pay, which is reported on a Form W-2, Form 1099, or other specified statements.
IRS REVEALS 2026 TAX ADJUSTMENTS WITH CHANGES FROM ‘BIG, BEAUTIFUL BILL’
The maximum annual deduction for overtime is set at $12,500 (or $25,000 for joint filers), with the deduction phasing out for taxpayers with a modified adjusted gross income over $150,000 (or $300,000 for joint filers). Importantly, this deduction is available to both itemizing and non-itemizing taxpayers.
The Fair Labor Standards Act mandates that most employees receive at least the federal minimum wage for all hours worked, along with overtime pay of at least time and one-half for hours exceeding 40 in a week.
President Donald Trump made “no tax on tips and overtime” a key part of his economic agenda that was included in the OBBBA. (Win McNamee/Getty Images)
SOCIAL SECURITY COMMISSIONER FRANK BISIGNANO NAMED IRS CEO
It’s important to note that some employees are exempt from overtime rules, including those who earn a salary of at least $1,128 per week or $58,656 annually, as well as workers in specific occupational roles.
The IRS is currently updating income tax forms and instructions to assist taxpayers in claiming these new deductions during the upcoming filing season.
GET FOX BUSINESS ON THE GO BY CLICKING HERE
The start date for the filing season for the 2025 tax year has yet to be announced, although it has typically begun in late January in recent years.
