What Are the New Deductions?
Under the One, Big, Beautiful Bill (signed Public Law 119-21 on July 4, 2025), eligible individuals may claim deductions for qualified tips and qualified overtime for tax years 2025 through 2028. (irs.gov)
- Qualified tips: Cash or similar payments in occupations that customarily and regularly received tips before December 31, 2024. Reported on W-2, Form 1099, or other statements. Deduction phases out for modified AGI over $150,000 (single); $300,000 (joint). Maximum is $25,000. (irs.gov)
- Qualified overtime: “Half” portion of time-and-a-half above regular pay for non-exempt workers, per Fair Labor Standards Act, with the same reporting thresholds. Same phase-out limits and maximum of $12,500 ($25,000 joint filers) for overtime deduction. (irs.gov)
How to Claim Them (and Examples)
| Step | Action | Example |
|---|---|---|
| 1. Determine eligible income | Look at W-2 box 7 or 1099; include unreported tips where substantiated | Ann receives $18,000 in box 7 (reported tips). No need for separate log. (irs.gov) |
| 2. Overtime deduction | Use payroll records showing overtime premium; only the excess over regular pay counts | Bob has $15,000 total overtime pay; overtime premium (half) is deductible. (irs.gov) |
| 3. Self-employed or tips via payment apps | Keep log books; if TPSO shows total payments but not tips, you can report tips you can substantiate | Doug tours; got $7,000 tip receipts and logs; even though Form 1099-K shows larger totals, only $7,000 tips deductable. (irs.gov) |
Planning & Compliance Tips
- Save all tip logs, payroll statements, and any form proofs. It's critical for substantiation.
- Ensure SSNs are properly reported if tips are reported by both spouse partners. Does cause joint filing requirement in some cases. (irs.gov)
- Use the maximum deductions early if possible—they can reduce taxable income significantly, especially for those with high overtime or tips.
- Beware income phase-outs. If you expect income near thresholds, modeling different scenarios helps. A small bump over $150,000 single or $300,000 joint dramatically reduces benefits.
Impacts & Who Benefits Most
- Service industry workers (servers, bartenders, hairstylists, etc.). Big impact for those whose tips are reported and documented properly.
- Overtime workers in retail, logistics, manufacturing. For those pushing extra hours, even partial amounts can be significant.
- Self-employed individuals who receive tips or customer cash payments. Paired with good recordkeeping, they get similar benefit.
Sample Case Study
Scenario: Maria is single, made $80,000 in 2025, worked part-time as a hair stylist, received $10,000 in reported tips, $5,000 in unreported tips substantiated via log; worked 500 hours overtime at premium rate of $2,500.
Qualified tips deduction: $15,000 tips (sum reported and substantiated) is allowed; since max is $25,000 and her income is below phase-out, full deduction.
Qualified overtime deduction: $2,500 (premium portion) also deducted.Total deductions reduce her taxable income by $17,500, saving her potentially thousands in taxes depending on her bracket.
Key Dates & Transition Relief
- Guidance issued in Notice 2025-69 provided clarifications and transition relief for TY 2025. Forms and instructions will be updated. (irs.gov)
- Proposed regulations for detailed definitions and occupation lists are forthcoming. Keep an eye on IRS’s rulemaking and public comment opportunities.
Final Thoughts
These deductions open new doors for workers who rely on tips or overtime pay—but only if you keep good records, file correctly, and understand phase-outs. When used smartly, they can put real money back in your pocket.