The IRS has unveiled its guidance regarding the “no tax on tips” and “no tax on overtime” provisions of the One Big Beautiful Bill Act (OBBBA), which offers deductions to workers for the upcoming 2025 tax year. This initiative follows the bill’s signing into law by President Donald Trump in July, after being passed by Republican majorities in Congress through a party-line vote.
The legislation, which aims to alleviate tax burdens on workers receiving tipped income and overtime compensation, has prompted the IRS and the Treasury Department to provide clarity for those eligible to claim these deductions. Notably, the IRS stated that taxpayers will need to assess their claimed amounts separately, as both Form W-2 and Form 1099 will not reflect the income from tips and overtime for 2025.
According to the IRS guidance, examples have been provided to help taxpayers understand how to calculate their deductions based on both reported and unreported income. Under the new provisions, workers receiving qualified tips are allowed a deduction of up to $25,000 annually, phasing out for individuals with a modified adjusted gross income exceeding $150,000, or $300,000 for joint filers. The IRS estimates that approximately 6 million workers report receiving tipped wages, and this deduction is set to remain effective from tax years 2025 through 2028.
In addition, the “no tax on overtime” provision permits individuals eligible for overtime pay to deduct excess compensation beyond their regular pay, specifically the “half” portion of the “time and a half” overtime. Taxpayers can deduct a maximum of $12,500 yearly, or $25,000 for those filing jointly, with similar income phase-out thresholds. Importantly, this deduction is accessible to both itemizing and non-itemizing taxpayers.
Despite these provisions, it is critical to note that some employees are exempt from overtime regulations, particularly those earning a salary of at least $1,128 per week, translating to an annual income of $58,656, along with others in certain occupational roles governed by specific exemptions.
The IRS is currently in the process of updating tax forms and instructions to aid taxpayers in this filing season, although the start date for the 2025 tax year filing has yet to be announced. Historically, this has begun in late January, providing a consistent timeline for tax preparation and submission in the coming year.
