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New Tax Breaks Under the OBBB Act: Deductions for Tips and Overtime Pay
On July 4, 2025, President Trump signed the One Big Beautiful Bill (OBBB) Act into law. Among many tax changes, the Act introduces two new provisions designed to benefit employees in tip-based industries and those who regularly work overtime. Here’s what you need to know.
Qualified Tips Deduction
What It Is
Starting in 2025 and continuing through 2028, employees can claim a special deduction for qualified tips. This applies to anyone working in an occupation that customarily and regularly received tips on or before December 31, 2024 (for example, restaurant servers, bartenders, and hotel staff).
How Much Can You Deduct?
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- You can deduct up to $25,000 per year in qualified tips.
- The deduction begins to phase out if your modified adjusted gross income (AGI) is above:
- $150,000 (single filers)
- $300,000 (married filing jointly)
- It phases out completely at:
- $400,000 (single filers)
- $550,000 (joint filers).
- Key Requirements
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- Your Social Security number must appear on your tax return.
- Married taxpayers must file a joint return to claim the deduction.
- If you’re self-employed and receive tips, the deduction only applies if your gross receipts are greater than your related business deductions.
Reporting Tips
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- Employers will report qualified tips on your W-2.
- If tips are not reported by your employer, you may need to use Form 4137 to report them.
- For nonemployees, tips must be reported on Form 1099-NEC or Form 1099-K.
Important Caution
Even though you can deduct tips for income tax purposes, the amounts are still subject to Social Security and Medicare taxes (FICA) and may also be subject to unemployment taxes (FUTA) for employers.
Qualified Overtime Pay Deduction
What It Is
From 2025 through 2028, individuals can also deduct qualified overtime pay. This deduction benefits employees who regularly work more than 40 hours a week under the rules of the Fair Labor Standards Act (FLSA).
How Much Can You Deduct?
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- Up to $12,500 per year for single filers.
- Up to $25,000 per year for joint filers.
- Phase-outs begin when AGI exceeds:
- $150,000 (single)
- $300,000 (joint)
- The deduction is completely phased out at:
- $275,000 (single)
- $550,000 (joint)
What Counts as Overtime Pay?
“Qualified overtime compensation” is overtime that must be paid under FLSA rules:
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- At least 1.5 times your regular pay rate.
- Applies to non-exempt employees working over 40 hours in a week.
- Your regular pay rate includes most types of pay, but certain payments are excluded.
Reporting Overtime Pay
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- Employers must include qualified overtime pay on your W-2.
- Nonemployees must receive reporting on a 1099-NEC.
- For overtime earned before January 1, 2026, the IRS allows “reasonable methods” to estimate and report.
- Eligibility Rules
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- The deduction is not allowed unless your Social Security number appears on your return.
- Married couples filing separately are not eligible.
Why This Matters
These new deductions under the OBBB Act can create meaningful tax savings for employees in industries with significant tips or overtime. However, the rules are detailed, with income phase-outs and specific reporting requirements.
Need Help?
If you think you may qualify for the new tips or overtime deductions, or if you’d like to estimate the potential savings, please contact our office. We’d be glad to help you plan ahead and make the most of these new opportunities.