No tax on tips/overtime

The IRS has published guidance for individuals who received tips or overtime during tax year 2025.

By Tami Stevenson

As part of the “One, Big, Beautiful Bill,” tax forms for 2025 will be unique from prior years. For the first time, ever, the tax form will have provisions for no tax on tips and no tax on qualified overtime. The forms will also show an extra $6,000 deduction for seniors age 65 and up. These added provisions will last through 2028.

     On November 21, the IRS published guidance for individuals who received tips or overtime during tax year 2025.

     Here is a summary from the IRS guidelines:

No Tax on Tips

Under the One, Big, Beautiful Bill, workers may be eligible for new deductions for tax years 2025 through 2028 if they received qualified tips. For tipped workers, the maximum annual deduction is $25,000, which phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

It is estimated that there are about 6 million workers who report tipped wages.

No Tax on Overtime

For tax years 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay (generally, the “half” portion of “time-and-a-half” compensation) that is required by the Fair Labor Standards Act and reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.

• Maximum annual deduction is $12,500 ($25,000 for joint filers).

• Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

The deduction is available for both itemizing and non-itemizing taxpayers.

Deduction for Seniors

• New deduction: Effective for 2025 through 2028, individuals who are age 65 and older may claim an additional deduction of $6,000. This new deduction is in addition to the current additional standard deduction for seniors under existing law.

◦ The $6,000 senior deduction is per eligible individual (i.e., $12,000 total for a married couple where both spouses qualify).

◦ Deduction phases out for taxpayers with modified adjusted gross income over $75,000 ($150,000 for joint filers).

• Qualifying taxpayers: To qualify for the additional deduction, a taxpayer must attain age 65 on or before the last day of the taxable year.

• Taxpayer eligibility: Deduction is available for both itemizing and non-itemizing taxpayers.

◦ Taxpayers must:

▪ include the Social Security Number of the qualifying individual(s) on the return, and

▪ file jointly if married, to claim the deduction.

For more information visit irs.gov.