As we head into the 2026 tax season, millions of workers are poised to benefit from a major change in federal tax law: the introduction of “no tax on tips” and “no tax on overtime” provisions. These new tax advantages—technically above-the-line tax deductions—give eligible taxpayers powerful opportunities to reduce their taxable income from tips and overtime pay for the 2025–2028 tax years. Understanding these changes and accurately applying them to your tax return is essential, and Hive Tax AI is the go-to AI tax research and AI tax planning tool to help you maximize your benefits for the 2026 tax filing season.
What “No Tax on Tips” Really Means
Thanks to the One Big Beautiful Bill Act passed in 2025, workers who receive tips can now deduct qualifying tip income from their federal taxable income. Here’s how it works:
- Qualified tips, such as voluntary cash or credit card tips received in eligible occupations, may be deducted on your federal tax return up to $25,000 per year.
- The deduction phases out for taxpayers with higher modified adjusted gross income (MAGI).
- Both employees and self-employed individuals can benefit, provided proper documentation and reporting are available.
This provision doesn’t mean tips aren’t subject to payroll taxes (like Social Security and Medicare) or potentially state income tax, but it does reduce your federal income tax liability.
“No Tax on Overtime” — How It Helps Working Americans
Similarly, the law includes a special overtime deduction:
- Workers may deduct qualified overtime compensation—typically the portion of overtime pay that exceeds regular earnings—up to $12,500 per year ($25,000 if filing jointly).
- Like the tip deduction, the benefit is phased out at higher income levels, and eligible taxpayers can claim it whether they itemize deductions or not.
This isn’t a permanent tax exemption, but a temporary federal income tax benefit that applies from tax year 2025 through 2028.
What You StillPay Tax On
Important nuance: while segments of your tip income and overtime pay can be deducted for federal income tax purposes, these earnings remain subject to:
- Payroll taxes like Social Security and Medicare
- State and local income taxes, depending on where you live
- Regular income tax rules outside of these deductions
So, the “no tax on tips” and “no tax on overtime” framing is shorthand for powerful federal deductions, not complete tax immunity.
How Taxpayers Can Claim These Deductions
To benefit from these deductions, you’ll need to:
- Gather accurate records of your tip income and qualified overtime compensation.
- Use IRS forms such as Schedule 1A and Form 1040 during the 2026 tax season.
- Follow IRS guidance under Notice 2025-69, which clarifies how to calculate deductions if employers don’t separately report tips or overtime.
The IRS is updating reporting requirements in 2026 to make this process smoother for taxpayers and employers alike.
Why Correct Application Matters
Misreporting or underestimating qualified tips or overtime can reduce your deductions or even trigger audits or penalties. Accurate calculation—and the right tax planning—can make the difference between a bigger refund and missed opportunity.
That’s where AI tax research and AI tax planning tools become indispensable.
Maximize Your Deductions With Hive Tax AI
Preparing for the 2026 tax season means mastering the latest tax law changes like no tax on tips and no tax on overtime. That’s exactly where Hive Tax AI shines:
- Deep AI tax research capabilities built to interpret the latest IRS guidance and legislative changes
- Intelligent analysis that identifies qualifying tips and overtime deductions
- Comprehensive AI tax planning recommendations tailored to your unique income and filing situation
Whether you’re a tax professional helping clients or an individual taxpayer seeking to lower your tax bill, Hive Tax AI is your one-stop solution to navigate these new deductions confidently.
Bottom Line
The “no tax on tips” and “no tax on overtime” provisions usher in powerful federal tax deductions for millions of workers—but claiming them correctly takes precision and deep tax insight. Leveraging Hive Tax AI’s advanced AI tax research and AI tax planning tool can help you stay compliant, maximize your deductions, and make the most of your refund during the 2026 tax season.
Start your AI-powered tax strategy with Hive Tax AI today!