Tip & Overtime Deduction: Your 2025–2028 Guide under the OBBBA
Quick Overview: The One Big Beautiful Bill Act (H.R. 1) adds two new above-the-line deductions for qualified tip income and overtime pay, helping millions of service and hourly workers reduce taxable income from 2025 through 2028.
✅ Qualified Tip Income Deduction
- Single filers: Up to $25,000 per year; married couples: Each spouse can claim up to $25,000.
- Only tips that are voluntary, not negotiated, and customary qualify.
- Workers must be in an occupation that "customarily receives tips" as of Dec 31, 2024.
💼 Qualified Overtime Pay Deduction
- Single filers: Up to $12,500 per year; married filing jointly: Up to $25,000.
- Only the premium portion of FLSA-mandated overtime pay qualifies (not total overtime wages).
- Applies to non-exempt hourly employees only — salaried exempt workers generally don’t qualify.
📊 Income Limits & Phase-Outs
- Both deductions begin to phase out at MAGI of $150,000 (single) / $300,000 (joint).
- Fully phased out at $400,000 (single) / $550,000 (joint) for tips, and $275,000/$550,000 for overtime.
⚠️ Practical Tips
- Keep detailed records — employers must now report qualified tip and premium overtime income separately.
- These deductions expire after the 2028 tax year unless extended.
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