On July 4th, 2025, President Trump signed the One Big Beautiful Bill (BBB)into law.  At the time, the title of the bill served a purpose – jumpstarting change by pushing through a massive amount of legislation in a single shot.  Although the sales tactic was effective, the title did little to inform the public about provisions impacting their lives.

As a result, few taxpayers realize how many changes will increase the disposable income of middle (and lower) class individuals and families.  These changes include making the Qualified Business Income Deduction (a small business windfall) permanent, a $12,000 Bonus Deduction for Married Seniors ($6,000 for singles), and a charitable deduction that filers can take without itemizing.

The BBB also includes two new deductions that will substantially increase the purchasing power of many service and hourly workers.  These include the ability of service workers to deduct tips they receive during the year and hourly workers to deduct a portion of their overtime pay.  How much will these deductions increase the buying power of those who qualify?  A lot – consider this: Every $100 of tips or overtime a person can deduct puts between $10 and $24 back into their pockets!

So, how will No Tax on Tips and No Tax on Overtime Work?  Glad you asked.  We’re still waiting on the mechanical details because the IRS has yet to interpret the law and transform it into lines on a tax return.  But here’s what we know today. 

No Tax on Tips: 

For the years 2025 to 2028, employees receiving qualified tip income can deduct up to $25,000 of the amount reported on their W-2s.  For married couples, a phaseout (which reduces and eventually eliminates the deduction) begins when income reaches $300,000.  For other filers, the phaseout starts at $150,000.  

Don’t buy into social media posts claiming that No Tax on Tips only applies to cash (which many already view as ‘tax free’ – they’re not).  In the IRS lexicon, “Cash” includes all forms of cash-equivalent payments, including credit and debit cards.

It is important to note that this is a deduction, not an ‘exclusion.’  This means that the tips are first reported as wages and included in Total Income (currently Line 9 of Form 1040).  When the law passed, there were claims that tips were then deducted "Above-the-Line," meaning before arriving at Adjusted Gross Income (AGI).  This is important because AGI is used to limit many other deductions and credits (generally, the lower AGI, the more deductions and credits).  Reducing AGI is also good news for those living in states that use the figure as their taxation starting point.  Unfortunately, however, these claims are incorrect.  The law inserts the No Tax on Tips deduction into Internal Revenue Code Section 63(b), which defines deductions taking place after calculating AGI and before taxable income.  There are now quite a few of these 63(b) deductions - meaning, guess what?  We'll likely receive a new form to complete!

How will we know the amount of deductible tip income?  My initial assumption was that Box 7 of Form W-2, Social Security Tips, would provide this amount.  However, the industry limitations mentioned below make it more likely that a new W2 box or code in Box 12 is afoot.

Expect some thorny rules to emerge as employees petition bosses to convert their existing pay into tips.  The law attempts to rein in abuse by limiting the deduction to industries where tipping is common, and mentions restaurant servers, bartenders, hairstylists, and nail technicians.  These, however, are just examples, indicating that union and industry lobbyists are hard at work “helping” to define precisely what constitutes a qualified tip and eligible employee.  

NEW - No Tax on Overtime: 

From 2025 through 2028, this new deduction is expected to yield a substantial tax cut for workers who regularly work overtime hours.  (Initially, I incorporated the phrase, financial windfall, into this sentence, but replaced it with substantial tax cut after discovering the following detail.) 

Overtime is defined as a pay rate equal to 1.5 times an employee’s regular hourly wage for hours exceeding forty during the workweek.  It is required, for most workers, by federal law.  For many employees, such as those in law enforcement, overtime pay constitutes a substantial portion of their annual income.  So, the phrase No Tax on Overtime, means no tax on overtime, right?  Wrong.

Disappointing Detail: Unfortunately, the law does not define overtime as commonly understood.   The deduction only applies to the 50% increase in regular pay required by the law – the half in time and a half.  

For example, if a worker’s regular hourly wage is $10, the overtime wage rate would be $15 per hour.  As the law is written, only the $5 increase is subject to the deduction, making “No Tax on One-third of Overtime” a more accurate, albeit less catchy description. 

Married couples can deduct up to $25,000 in overtime, while other filers can deduct up to $12,500.  As with tips, the income is reported as salaries and wages and then deducted between AGI and Taxable Income.  It also starts to phase out once income on joint returns reaches $300,000 ($150,000 for other filers).

I anticipate a new Box 12 code on Form W-2s to report the deductible amount, as well as additional regulations to prevent sudden changes to the job descriptions and compensation of overtime-exempt employees.

Thank You!

We hope this article has helped you gain a better understanding of No Tax on Tips and No Tax on Overtime.  We invite you to check out Overnight Accountant’s course offerings and blog.  We’re also adding materials to our X account and YouTube page to keep Tax Pros, Taxpayers, and Business Owners informed and increasing their income.