IRS releases guidance for Americans to cash in on new tax break on tips and overtime pay
The IRS has issued guidance for workers who can claim the deduction for tips and overtime pay — part of the One Big Beautiful Bill Act — for the 2025 tax year.
The guidance explains how to report the new deductions on tax returns. The IRS is also updating income tax forms and instructions for taxpayers for the upcoming filing season to help with the new tax breaks.
The guidance includes examples that explain how the tipped income and overtime deductions work based on the relevant reported or unreported income.
Workers can now deduct tips or overtime pay if those earnings are reported on Forms W-2 or 1099.
The IRS estimates that about 6 million workers report tipped wages.
In July, President Trump signed into law the Republican tax and budget bill, which made permanent Mr. Trump’s 2017 tax cuts and included other tax and policy provisions. The no-tax-on-tips and no-tax-on-overtime provisions were campaign promises Mr. Trump made last year in his run for a second term.
The new law also nixed taxes on some Social Security retirement benefits, allowed tax deductions for interest on auto loans for vehicles with final assembly in the U.S., increased the child tax credit to $2,200 and created a new retirement savings program for minors known as “Trump Accounts” with an initial government contribution of $1,000 for children born between late 2025 and 2028.
Taxpayers eligible to claim the tipped and overtime income deductions may have to determine those amounts separately this year, the IRS said, as Forms W-2 and 1099 won’t be updated to include income from tips and overtime for the 2025 tax year.
Under the bill, workers who receive qualified tips can deduct up to $25,000 from 2025 through 2028. Eligible overtime pay includes a deduction of up to $12,500 for single filers or $25,000 for joint filers, with the same income phaseouts, from 2025 through 2028.
Deduction phases out for taxpayers whose modified adjusted gross income exceeds $150,000, or $300,000 for joint filers.
The “no tax on overtime” provision allows individuals who receive qualified overtime compensation to deduct pay that exceeds their regular pay: generally, the “half” portion of “time-and-a-half” compensation reported on Forms W-2 or 1099 or other specified statements.
The Fair Labor Standards Act mandates that pay for most employees be at least the federal minimum wage for all hours worked and overtime pay of at least time and one-half of their regular pay for working over 40 hours a week.
The start date of the filing season for the 2025 tax year has not been announced yet.
