On July 4, 2025, President Trump signed the One Big Beautiful Bill (OBBB) Act, introducing several tax changes for individuals and businesses. Two exciting new deductions, promised during his 2024 campaign, focus on helping workers who earn tips or overtime pay. Here’s a simple breakdown of these changes for 2025 through 2028.
Deduction for Tips
If you work where tips are common, you can now deduct up to $25,000 of your cash tips from your taxable income each year. This means you’ll pay less income tax on those tips.
However, there’s an income limit:
- If you’re single and your income (after certain adjustments) is over $150,000, the deduction starts to shrink.
- For married couples filing jointly, the limit starts at $300,000.
- The deduction completely disappears if your income reaches $400,000 (or $550,000 for joint filers).
Important: While this deduction lowers your income tax, you still have to pay Social Security and Medicare (FICA) taxes on your tips.
Deduction for Overtime Pay
If you work more than 40 hours a week at a job and get paid overtime, you can deduct up to $12,500 of that overtime pay from your taxable income each year. For married couples filing jointly, the limit is $25,000.
Similar to the tips deduction:
- The deduction starts to phase out if your income (after adjustments) is over $150,000 for singles or $300,000 for joint filers.
- It’s fully phased out at $275,000 for singles or $550,000 for joint filers.
Your employer will still report your overtime pay on your W-2 form. For 2025, employers can use a reasonable method to estimate how much of your pay counts as overtime, as directed by the IRS.
Note: Like the tips deduction, overtime pay is still subject to FICA taxes, so this only reduces your income tax, not payroll taxes.
What This Means for You
These deductions are a great opportunity for workers like servers, bartenders, delivery drivers, or anyone earning overtime to save on taxes. However, the income limits mean higher earners may get a smaller deduction or none at all. Be sure to keep track of your tips and check your final paystub and W-2 for overtime pay to claim these benefits when filing your taxes from 2025 to 2028.