IRS Clarifies ‘No Tax on Tips’ and Overtime

IRS Issues Guidance on Trump’s ‘No Tax on Tips’ and Overtime Deductions

The IRS has released long-awaited guidance on two signature tax provisions signed into law under President Donald Trump: “no tax on tips” and “no tax on overtime.” The provisions, included in the One Big Beautiful Bill Act, apply to income earned during the 2025 tax year and are designed to put more money back into the pockets of working Americans.

What Workers Need to Know Before Filing

According to the IRS, eligible workers can deduct up to $25,000 in qualified tip income each year. However, the deduction begins to phase out for individuals earning more than $150,000 in modified adjusted gross income, or $300,000 for joint filers. The agency estimates roughly six million Americans report tipped wages, making this provision especially impactful for workers in hospitality, food service, and other tip-based industries.

The tipped income deduction will be available for tax years 2025 through 2028.

Overtime Pay Also Gets a Tax Break

The law also allows workers to deduct a portion of their overtime pay. Specifically, employees may deduct the “half” portion of time-and-a-half overtime compensation—the amount earned above their regular pay rate. The maximum annual deduction is $12,500 for individuals and $25,000 for joint filers, with the same income phase-out thresholds as the tip deduction.

Notably, the overtime deduction is available whether or not a taxpayer itemizes deductions.

Important Filing Considerations

Because tax forms such as Form W-2 and Form 1099 have not yet been updated to separately track tips and overtime for 2025, the IRS says workers may need to calculate these amounts independently when filing. The agency is updating tax forms and instructions to help taxpayers claim the deductions accurately this filing season.