The Internal Revenue Service (IRS) has released new guidance for taxpayers concerning the "no tax on tips" and "no tax on overtime" provisions. These new rules are part of the One Big Beautiful Bill Act (OBBBA), signed into law by President Trump in July. The guidance aims to help workers understand how to claim these deductions for the 2025 tax year.
Millions of American workers stand to benefit from these tax changes. The IRS is working to update its forms and instructions, but taxpayers will need to calculate some amounts themselves for the upcoming filing season.
Key Takeaways
- New IRS guidance clarifies how to claim "no tax on tips" and "no tax on overtime" deductions.
- Deductions apply for the 2025 tax year, under the One Big Beautiful Bill Act.
- Tipped income deduction maximum is $25,000 annually, phasing out for higher earners.
- Overtime deduction maximum is $12,500 annually (or $25,000 for joint filers), also with income phase-outs.
- Taxpayers may need to calculate these deductions manually for the 2025 tax year.
Understanding the "No Tax on Tips" Provision
The "no tax on tips" provision allows workers who receive qualified tips to deduct a significant portion of that income. This deduction has an annual maximum of $25,000 per taxpayer.
However, the benefit is not universal. The deduction begins to phase out for taxpayers whose modified adjusted gross income (MAGI) exceeds $150,000. For joint filers, this phase-out threshold is $300,000.
Fact Check
The IRS estimates approximately 6 million workers report tipped wages. This tipped income deduction is scheduled to be in effect for tax years 2025 through 2028.
The new IRS guidance includes examples to help workers understand how to calculate their eligible tipped income deductions. This is especially important as standard tax forms like W-2 and 1099 will not immediately reflect these new deductions for the 2025 tax year.
Details on the "No Tax on Overtime" Deduction
Alongside the tipped income provision, the OBBBA also introduced a "no tax on overtime" rule. This allows individuals to deduct the portion of their eligible overtime compensation that exceeds their regular pay. Generally, this refers to the "half" portion of "time and a half" overtime pay.
The maximum annual deduction for overtime is $12,500 for individual filers. For joint filers, this maximum doubles to $25,000.
Background
The Fair Labor Standards Act mandates that most employees receive at least the federal minimum wage and overtime pay of at least one and a half times their regular rate for hours worked over 40 in a week. However, certain employees, such as those earning a salary of at least $1,128 per week ($58,656 annually), are exempt from these overtime rules.
Similar to the tip deduction, the overtime deduction also phases out for taxpayers with a modified adjusted gross income over $150,000, or $300,000 for joint filers. A key aspect of this provision is that it is available to both itemizing and non-itemizing taxpayers, broadening its reach.
Navigating the 2025 Tax Season
The IRS has indicated it is in the process of updating income tax forms and instructions to assist taxpayers in claiming these new deductions. However, for the 2025 tax year, workers who qualify may need to determine these amounts separately.
President Trump signed the One Big Beautiful Bill Act into law in July, following its passage by Republican majorities in Congress. This legislation represents a significant change to the tax landscape for millions of workers.
"The Treasury Department and IRS are now providing guidance as the law directed to help workers determine their deductions," a recent IRS notice stated.
The exact start date for the 2025 tax filing season has not yet been announced. In recent years, it has typically commenced in late January. Taxpayers should monitor official IRS channels for updates on forms and further guidance as the filing season approaches.
Impact on Workers and the Economy
These new tax provisions could provide a welcome financial boost for workers in industries heavily reliant on tips, such as hospitality and service sectors. The overtime deduction will also benefit employees who regularly work beyond standard hours.
The changes aim to put more money directly into the pockets of eligible workers. This could potentially stimulate consumer spending and provide relief for households managing their budgets.
Workers should keep detailed records of their tipped income and overtime hours throughout 2025. This will ensure they have the necessary documentation to accurately claim these deductions when filing their taxes.
Consulting with a tax professional or utilizing IRS resources will be crucial for taxpayers looking to maximize these new benefits and navigate the updated tax landscape.
