"No Tax on Tips & Overtime" Deep Dive
These benefits are "above-the-line" deductions, reducing your Adjusted Gross Income (AGI). This is valuable because it's available whether you itemize or take the standard deduction, and it can help you qualify for other tax credits.
- What are "Qualified Tips"?
- Voluntary payments from a customer (cash, credit/debit card, tip pools).
- Must be earned in an occupation that "customarily and regularly received tips" before 2025. The Treasury will release an official list.
- EXCLUDES mandatory service charges or automatic gratuities.
- The income must be properly reported on your W-2 or via Form 4137.
- What is "Qualified Overtime"?
- This is the most complex rule. The deduction is ONLY for the **premium portion** of overtime pay required by the **federal Fair Labor Standards Act (FLSA)**.
- FLSA requires pay at 1.5x your regular rate for hours over 40 in a workweek. If your regular pay is $20/hr, your OT rate is $30/hr. The deductible portion is only the **$10 premium**.
- EXCLUDES overtime paid solely due to state/local laws (like daily OT), union contracts, or employer policy (like holiday pay).
Expanded SALT Deduction Deep Dive
This benefit is an itemized deduction claimed on Schedule A. You only benefit if your total itemized deductions (SALT, mortgage interest, charity, etc.) exceed the standard deduction for your filing status.
- Who Qualifies? Any taxpayer who itemizes their deductions.
- The Steep Phase-Out: The benefit of the increased cap is reduced for higher incomes. Your potential deduction is reduced by 30% of your MAGI over the threshold. For example, at $550k MAGI (for a joint filer), your max deduction is cut by $15,000 (($550k - $500k) * 30%).
- The $10,000 Floor: The phase-out cannot reduce your SALT deduction below $10,000 ($5,000 for MFS), so no one is worse off than under the old law.
- Critical Update for Business Owners: The Pass-Through Entity Tax (PTET) workaround was preserved. This allows owners of partnerships and S-corps to have their state taxes paid and deducted at the business level, bypassing the individual SALT cap entirely. This remains a powerful strategy.
Audit Defense & Record Keeping
Meticulous records are your best defense. Keep these documents to substantiate any claims.
- For Tip & OT Deductions:
- Form W-2: The primary document. Starting in 2026, it will have new boxes for qualified income.
- Pay Stubs: Crucial for proving the FLSA premium portion of overtime. A generic "Overtime" line may not be enough.
- Personal Tip Log: A daily record of cash tips is essential, especially if you self-report tips.
- Job Description: Helps prove you work in a "traditionally tipped occupation."
- For the SALT Deduction:
- Proof of Payment: Canceled checks, bank statements, or mortgage escrow statements for property taxes.
- Tax Returns: Copies of filed state/local income tax returns and W-2s showing taxes withheld.
- Schedule K-1: Essential for business owners using a PTET workaround.
Official & Reputable Resources
Tax laws are complex and subject to new guidance. Always refer to official sources and consult a qualified professional.
-
Internal Revenue Service (IRS): The primary source for forms, instructions, and official guidance. Monitor for news releases regarding the OBBB Act (Public Law 119-21).
www.irs.gov
-
Professional Analysis: Major accounting and law firms (like RSM, Littler Mendelson, Anchin) and non-profits like the Tax Foundation provide detailed analysis of new legislation.
-
More U.S. Tax Saving Tips Podcast:
Listen on Spotify
Disclaimer: This tool is for informational and estimation purposes only. It is not tax advice. Consult with a qualified tax professional for advice tailored to your specific situation.
