As part of the One, Big, Beautiful Bill Act, taxpayers are entitled to a tax deduction on “qualified overtime” and “qualified tips” received during tax years 2025 through 2028. The following is a summary of the new rules as well as guidance on the application of transition relief for the 2025 tax year.

Summary of Terms

• Effective Tax Years: The tax relief applies to overtime and tip income earned from January 1, 2025, through December 31, 2028.
  
  
• No Tax on Tips: Individuals in industries where tips are "customarily and regularly" received can deduct up to $25,000 in qualified tips. This applies to any reported cash or charged tips. Qualified industries include hospitality, food service, gambling, grooming, and others listed by the IRS. Mandatory service charges that are tacked onto a bill do not count as qualified tip income.
  
  
• No Tax on Overtime: There is a deduction of up to $12,500 for individual filers ($25,000 filing jointly) for qualified overtime paid during a year. Only the portion of overtime required to be paid under the Fair Labor Standards Act (FLSA) is considered to be “qualified overtime.” This means that overtime required to be paid pursuant to a collective bargaining agreement or pursuant to state law is not deductible. Further, only the premium portion of overtime is deductible (e.g., the .5 per overtime hour, not the full 1.5 time per hour).

Continue reading a summary of the new rules as well as guidance on the application of transition relief for the 2025 tax year.