New federal law — under the One Big Beautiful Bill Act (OBBBA) — introduces important deductions for “qualified tips” and “qualified overtime” compensation from 2025 through 2028. If you receive tips or overtime pay, it’s critical to understand eligibility, limits, and how to claim these deductions. Use an AI-powered research tool like Hive Tax AI to analyze your situation and maximize deductions confidently — filing season just got more complex, but also more opportunity.
What Are the New Tip & Overtime Deductions
Under the One Big Beautiful Bill Act, the federal government now allows certain workers to deduct from taxable income:
- Qualified Tips — Voluntary cash or charged tips (or shared tips) from customers, if your occupation was on the IRS-approved list of tip-earning jobs as of December 31, 2024.
- Qualified Overtime Compensation — The overtime premium mandated by the Fair Labor Standards Act (FLSA). In other words, only the extra “half-time” portion of a “time-and-a-half” overtime rate — not the entire overtime pay — qualifies.
These deductions are treated as above-the-line deductions, reducing your adjusted gross income (AGI), even if you don’t itemize.
Limits, Phase-outs, and Eligibility
- Maximum tip deduction: up to $25,000 per year.
- Maximum overtime deduction: up to $12,500 per individual (or $25,000 if married filing jointly) per year.
- Phase-out thresholds: Single filers with modified adjusted gross income (MAGI) over $150,000, and joint filers with MAGI over $300,000, are not eligible.
- Deduction available to both itemizing and non-itemizing taxpayers.
- For self-employed individuals receiving tips: tip deduction cannot exceed net income from the business (before taking the deduction).
- Only overtime mandated by federal law qualifies. Overtime voluntarily paid by an employer, or overtime required by state/local law or contract beyond FLSA minimums, does not qualify.
What It Means in Practice
- A server whose 2025 W-2 shows $18,000 in reported tips could deduct the full $18,000 (assuming all conditions met).
- An employee working overtime under FLSA requirements can subtract just the overtime premium — not all earnings from overtime hours.
- Because the deduction is “above the line,” it reduces AGI, which may also help with other tax thresholds (e.g., phaseouts, credits).
- Payroll and employers will need to start adjusting reporting practices — though for 2025, the IRS has provided transitional relief: employers won’t be penalized if they don’t separately report tips or overtime pay to employees.
Things to Watch Out For
- Tips must be “qualified” — voluntary, and from occupations on the approved list as of end of 2024. Service charges or mandatory gratuities may not qualify.
- Overtime deduction only applies to the FLSA-required premium. Other extra pay may not qualify.
- Even though these deductions reduce federal income tax, tips and overtime remain subject to Social Security and Medicare payroll taxes.
- State or local income tax treatment may differ depending on your jurisdiction (some states may still tax tips or overtime differently).
How to Apply — and Use AI Tools to Help
- Gather documentation — W-2s, 1099s, any statements from employer showing tips or overtime, and records of actual hours worked.
- Confirm eligibility — verify that your occupation is included among IRS-approved tipped occupations (as of 2024).
- Compute deduction amounts — calculate qualified tip income and overtime premium; check AGI against phase-out thresholds.
- Use tax software or an AI tool — this is where Hive Tax AI shines: it can help you analyze details, run various scenarios (e.g., different income levels, tip/overtime amounts), and optimize deductions while respecting all limitations and IRS guidance.
- File carefully — report the deductions properly, even if you don’t itemize, to ensure the deduction reduces your AGI.
Why This Change Matters
For many tipped and hourly-wage workers — restaurant staff, hospitality, beauty services, freelance service providers, rideshare/taxi drivers, etc. — this is one of the most dramatic shifts in decades: federal income tax relief for compensation types long considered taxable.
Because the deduction is above-the-line, it benefits a broader swath of taxpayers (even non-itemizers). It may reduce taxable income, shrink tax bills, and improve eligibility for credits or other tax-sensitive thresholds tied to AGI.
That said, the complexity of eligibility, reporting, and income phase-outs makes it a strong candidate for professional help or smart software — making tools like Hive Tax AI especially valuable to ensure compliance and maximize value.
Key Takeaways
- The “No Tax on Tips” and “No Tax on Overtime” provisions under the One Big Beautiful Bill Act allow qualified deductions from federal taxable income for tips and overtime pay in effect for 2025–2028.
- Limits and phase-outs apply: up to $25,000 for tips; $12,500 (single filer) or $25,000 (joint filer) for overtime; ineligible for MAGI over $150,000 (single) / $300,000 (joint).
- Overtime deduction only covers the half-time premium under FLSA, not total overtime pay; tips must be “qualified” and from approved occupations.
- Social Security and Medicare taxes still apply; state tax treatment may vary.
- Using an AI-powered tool such as Hive Tax AI can simplify the analysis, optimize deduction amounts, and ensure compliance with new IRS rules.