If you wait tables, cut hair, drive for an app, or clock overtime, part of that pay is now deductible. Up to $25,000 in tips and $12,500 in overtime can come off your taxable income. That’s real money. It’s also not the “no tax on tips” the slogan sold you.
The One Big Beautiful Bill created two new deductions, and the IRS spelled out how they work back in January. You can claim them on your 2025 return, the one you’re filing now.
Tips first. If you work in an occupation that customarily gets tipped, and the IRS has published the list, think wait staff, bartenders, salon workers, personal trainers, gig drivers, you can deduct up to $25,000 of qualified tips. Qualified means voluntary cash or charged tips, the kind reported on your W-2, a 1099, or Form 4137.
Overtime next. You can deduct the premium half of time-and-a-half, the extra your employer is required to pay over your regular rate, up to $12,500, or $25,000 for a married couple filing jointly.
Here’s what the slogan leaves out. This is a deduction, not an exemption, and it cuts your federal income tax, not your whole tax bill. The IRS notes your W-2 and 1099 forms don’t change this year, so nothing got carved out of your paychecks along the way. You take the break at tax time, it’s capped, and it phases out. “No tax” it is not.
Run the numbers. A server with $20,000 in tips, sitting in the 12% bracket, deducts the full $20,000 and cuts federal income tax by about $2,400. A warehouse worker with $8,000 in overtime premium deducts that $8,000. You get this whether or not you itemize.
Two catches. Both deductions shrink once your income passes $150,000, or $300,000 for a couple. And there’s a floor: earn too little to owe federal income tax, and a deduction can’t cut a bill that isn’t there.
Up to $25,000 in tips and $12,500 in overtime, off your taxable income. FICA still takes its cut of every dollar, and so does withholding.
Verdict: if tips or overtime are a real part of your pay, this is real money. Claim it. Just don’t expect your tip income to land in your pocket tax-free.
Claim it on your 2025 return, and make sure your tips actually show up on your W-2, a 1099, or Form 4137. You can only deduct what’s reported.
For 2026, you’ve got a choice. Wait for a bigger refund next spring, or get the money in your checks now by lowering your withholding. The IRS updated its free Tax Withholding Estimator to handle exactly this, and it’ll walk you through a new W-4 if a change makes sense.
Keep reporting every tip. The break only works on reported income, so shorting the numbers to dodge tax today just hands back the deduction tomorrow. Fold the change into your monthly plan with our budget planner.
For the record: both deductions run for tax years 2025 through 2028. Self-employed tip earners can’t deduct more than their net income from the work that earned the tips.
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