Two new federal income-tax deductions can lower your tax bill for 2025 through 2028:
- A deduction for tips you properly report, and
- A deduction for the overtime “premium” (the half in “time-and-a-half”) required by federal law.
Heads-up: These are income-tax deductions only. Payroll taxes (Social Security and Medicare/FICA) still apply and employers keep withholding as usual. Reporting changes start in 2026; 2025 uses current W-2/withholding rules.
The Tip Deduction
What you can deduct:
- Up to $25,000 of qualified tips each year (2025–2028).
- You don’t need to itemize to claim it.
What counts as “qualified tips”:
- Voluntary cash tips in jobs that customarily received tips by 12/31/2024.
- “Cash tips” include card tips that flow through the employer and tips shared in a valid tip pool.
- Mandatory service charges don’t count.
- Treasury/IRS will publish the eligible occupations within 90 days of enactment.
Income limits and filing rules:
- The $25,000 deduction phases down as income rises: it’s reduced by $100 for every $1,000 of modified AGI over $150,000 ($300,000 if married filing jointly).
- You must include your SSN, and married couples must file jointly to claim it.
The Overtime Deduction (what actually qualifies)
What you can deduct:
- Up to $12,500 (single) or $25,000 (married filing jointly) of qualified overtime compensation (2025–2028).
- You don’t need to itemize.
What counts:
- Only the overtime “premium” required by Section 7 of the FLSA, that’s the extra half-time for hours over 40 in a week.
- Contract or state-law overtime doesn’t qualify unless it also meets the federal FLSA definition. Same income limits, SSN, and MFJ-if-married rules as above.
What stays taxable (don’t be surprised)
- Tips and overtime are still wages for FICA: Social Security and Medicare taxes still apply.
- State/local income taxes still apply unless your state changes its law.
- These deductions lower your federal income tax when you file your return.
How to claim (step-by-step)
For 2025 (transition year)
- Keep doing payroll and reporting the same as today, the IRS said no changes to W-2s/withholding tables for TY 2025.
- You’ll claim the deductions on your 2025 return.
Starting 2026
- Expect updated IRS forms/instructions with new fields for tips and overtime so employers can show those amounts separately.
- Coordinate with payroll to capture them.
Why This Matters Now
- This is temporary: You only have four years (2025-2028) to benefit from these deductions.
- The savings are substantial: For many workers, this could be worth thousands of dollars annually.
- Proper planning required: To get maximum benefit, you need to ensure proper reporting and understand the requirements.
Ready to maximize your tip and overtime tax savings? Contact us to understand exactly how these deductions apply to your situation and ensure you’re capturing every dollar of benefit available.
