Federal Tax Deductions for Tips and Overtime Pay Now Available Through 2028
Sources: National Law Review and USA Today
Under the One Big Beautiful Bill signed into law on July 4, 2025, federal income taxes on tips and overtime pay are now waived through 2028. Here's how it works:
💵 What You Can Deduct
- Up to $25,000 in reported tips
- Up to $12,500 in overtime pay
- These deductions apply to your federal taxable income, not your weekly paycheck
🧾 How It Affects You
- No change to your take-home pay during the year — employers still withhold taxes as usual
- Savings kick in at tax time: When you file your 2025 return in early 2026, you can deduct those earnings and potentially get a larger refund
- Middle-income earners stand to benefit most — especially in industries like hospitality, healthcare, and manufacturing
⚠️ Key Limitations
- Deductions phase out for individuals earning over $150,000 ($300,000 for joint filers)
- State taxes still apply — New Jersey workers, for example, will still owe state income tax on tips and overtime
- Social Security and Medicare taxes remain unchanged
- Only qualified overtime pay may be eligible — IRS guidance will likely define what counts, and not all extra compensation may meet the criteria.
🧠 Example
A hotel bartender earning $45,000 plus $5,000 in tips could get back all federal taxes withheld from those tips. A nurse with $80,000 salary and $15,000 in overtime could potentially save thousands on their tax bill.
If you’re curious how this might affect your own refund, the White House offers a calculator to estimate your savings. https://www.whitehouse.gov/obbb/
Want help figuring out how this fits into your financial planning? I’d be happy to walk through it with you.