New Tax Breaks for Tips and Overtime.
The "One Big Beautiful Bill Act" introduces two major temporary deductions for service and hourly workers for tax years 2025-2028. This guide breaks down the complex rules to help you understand if you qualify and what it means for your wallet.
The New Rules at a Glance
The bill creates two separate "above-the-line" deductions, meaning you can claim them even if you take the standard deduction. Here’s how they compare.
Tip Income Deduction
- Max Deduction:
- $25,000 per person.
- Joint Filers:
- Each spouse has their own $25,000 limit (up to $50,000 total).
- What Qualifies?:
- Voluntary tips in customary occupations (servers, stylists, drivers, etc.).
- Excludes:
- Mandatory service charges; professions like law or finance.
Overtime Pay Deduction
- Max Deduction:
- $12,500 for single filers.
- Joint Filers:
- Limit is doubled to a combined $25,000.
- What Qualifies?:
- Only the **premium portion** (e.g., the "half" in "time-and-a-half") of overtime pay.
- Key Rule:
- Only for overtime **required by the Fair Labor Standards Act (FLSA)**, primarily affecting non-exempt hourly workers.
Estimate Your Tax Savings
Enter your information below to see how these new deductions could reduce your taxable income and federal tax bill. The calculation adjusts for income-based limitations.
1. Your Tax Profile
2. Your Estimated Results
Allowable Deduction
$20,000
Est. Tax Savings
$4,400
Taxable Income After
$60,000
Who Actually Qualifies?
Eligibility is specific. The tip deduction is based on your occupation, while the overtime deduction depends on your legal job classification under the Fair Labor Standards Act (FLSA).
✅ Eligible: Restaurant Server
A server earns $35,000 in tips. Her job is a "customarily tipped occupation." She can deduct up to the $25,000 cap, reducing her taxable income significantly.
✅ Eligible: Hair Stylist
A self-employed stylist earns $20,000 in tips. This is below the cap, so she can deduct the full $20,000.
❌ Ineligible: Banquet "Service Charge"
A 20% "service charge" automatically added to a banquet bill is considered a wage, not a voluntary tip. This income is not deductible.
The Fine Print You Need to Know
Two key provisions limit the value and longevity of these tax breaks: an income-based phase-out and a built-in expiration date.
Income Phase-Out
The deductions are reduced for higher earners. For every $1,000 of MAGI above the threshold, your deduction is cut by $100.
Single Filers: Starts at $150k, ends at $275k (Overtime) / $400k (Tips).
Joint Filers: Starts at $300k, ends at $550k (Overtime) / $550k (Tips).
The 2028 "Fiscal Cliff"
These deductions are temporary and are set to **expire automatically after the 2028 tax year**. This is a deliberate legislative strategy to lower the bill's official cost. A future Congress would need to act to prevent what would be framed as a "tax hike" on service and hourly workers.
