Two New, Temporary Federal Deductions
The One Big Beautiful Bill Act created two above-the-line federal income tax deductions available for tax years 2025 through 2028: one for qualifying tip income, one for qualifying overtime pay. Both reduce your federal taxable income — neither affects Social Security or Medicare tax, which still apply to the full amount earned.
No Tax on Tips
Deducts up to $25,000 per tax return per year in qualifying voluntary tips (not mandatory service charges), for workers in occupations on the IRS's published list. The deduction phases out by $100 for every $1,000 of Modified AGI above $150,000 (single) / $300,000 (married filing jointly).
No Tax on Overtime
Deducts up to $12,500 (single) / $25,000 (married filing jointly) per year — but only the "extra half" premium portion of time-and-a-half overtime pay required under the Fair Labor Standards Act, not the full 1.5× amount. The same income phase-out thresholds and $100-per-$1,000 reduction apply.
Deduction = min(income, cap) − max(0, floor((MAGI − threshold) ÷ 1,000)) × 100
Worked Example
A single filer with $60,000 MAGI, $8,000 in tips and $2,000 in qualifying overtime premium pay is well under the $150,000 phase-out threshold, so the full amounts are deductible: $10,000 total deduction. At a 22% marginal rate, that is about $2,200 in federal tax savings — real money back, without itemizing.
What These Deductions Don't Do
- They don't reduce Social Security or Medicare (FICA) tax — those apply to your full pay.
- They don't apply to state income tax unless your state separately adopts the same rule.
- They expire after the 2028 tax year unless Congress extends them.
Simplified estimate for planning purposes — confirm eligibility (occupation, filing status, employer type) with a tax professional or IRS Schedule 1-A instructions.