Understanding Your New Deductions Under OBBBA
With the passage of the One Big Beautiful Bill Act (OBBBA) in July 2025, individuals earning cash tips or overtime compensation may now claim above-the-line deductions on their federal income tax returns. These deductions are available for tax years 2025 through 2028.(taxnews.ey.com)
Who’s Eligible
- Tipped Occupations: Employees and self-employed individuals in occupations customarily and regularly receiving tips (e.g., bartenders, servers, hairdressers, hotel housekeeping).(mondaq.com)
- Qualified Tips: Cash or card-based tips reported on Forms W-2, 1099, or by individual filing Form 4137. Not eligible if your trade or business is an SSTB under § 199A.(mondaq.com)
- Qualified Overtime Compensation: The portion of overtime pay that exceeds the regular pay rate (half-time over the base rate). Must be correctly reported.(taxnews.ey.com)
Limits & Phase-Outs
| Filing Status | Tip Deduction Limit | Qualification | Phase-out Threshold |
|---|---|---|---|
| Single | $25,000 | Tips only or self-employment income; SSTB limitation | MAGI over $150,000 (forbes.com) |
| Married Filing Jointly | Same, but joint MAGI phase-out = $300,000 (forbes.com) |
For overtime, similar limits generally apply: $12,500 or $25,000 depending on filing status.(mondaq.com)
Actionable Advice for Employers & Self-Employed Individuals
Employers & Payers
- For tax year 2025 only, the IRS is offering penalty relief under IRC §§ 6721 & 6722 if you cannot yet meet new reporting requirements for tips, occupation codes, or overtime amounts.(irs.gov)
- Forms W-2 and 1099 have not been updated for 2025. You’re NOT required, but encouraged, to voluntarily provide detailed statements showing tips & overtime. Acceptable methods: online portals, written statements, or adding overtime in Box 14 of W-2.(adp.com)
Employees & Self-Employed Individuals
- Ensure you report tips accurately, including cash tips or tips split via tip-pooling / sharing when applicable.(adp.com)
- Maintain records of overtime compensation: pay stubs, employer statements, etc., especially since some overtime pay qualifies only after you detail “qualified overtime compensation.”(taxnews.ey.com)
- Check whether your occupation qualifies as a tipped occupation using the Treasury’s list of tipped occupation codes (TTOCs).(adp.com)
Examples to Illustrate
-
Sara is a server making significant cash tips. In tax year 2025, she gets $20,000 in tips and has MAGI of $160,000 (single). She can deduct all $20,000 (since under the $25,000 cap) but faces a phase-out between $150,000–$175,000; so only part of the deduction may apply.
-
Jacob, a construction worker, earns $40,000 regular wages + $6,000 overtime. The “qualified overtime” deduction kicks in only for the portion above regular rate (half of overtime pay). If his employer reports overtime separate accounting to TPM/statements, Jacob can use that to deduct accordingly.
What Happens in 2026 and Beyond
From tax year 2026, the reporting changes become more formalized: updated Forms W-2 and 1099 will include boxes specifically for qualified tips, overtime, and occupation codes. Penalties will resume for failures beginning that year.(taxnews.ey.com)
This change presents a substantial planning opportunity—especially for those in tipped occupations. Whether you’re an employer needing to adjust payroll systems or an individual who earns tips or overtime, being proactive now sets you up for success going into 2026.