If you earned tips or worked overtime in 2025, you could qualify for new tax deductions that put money back in your pocket. The Treasury and IRS released guidance that explains how these rules work, and I want to walk you through the highlights, so you understand what applies to you.
The IRS issued Notice 2025-69 to clarify how you can figure out the amount you are allowed to deduct, even though Forms W 2 and 1099 have not changed. Employers are not sending a separate breakdown of cash tips or qualified overtime on those forms, so you will use the information you already have to calculate your deduction.
The IRS is updating the income tax forms and instructions for this filing season to help you claim these deductions correctly.
No Tax on Tips
Under the One, Big, Beautiful Bill, you may qualify for a deduction if you receive eligible tips from 2025 through 2028. The maximum deduction is twenty-five thousand dollars. It begins to phase out if your modified adjusted gross income is over one hundred fifty thousand dollars, or three hundred thousand for joint filers.
Let me walk you through a few of the examples the IRS shared so you can see how this might apply to you.
Example one:
Ann is a restaurant server. Her W 2 shows eighteen thousand dollars of social security tips in box seven, and she did not report any additional tips. Ann can use that eighteen thousand when figuring out her qualified tips.
Example two:
Doug is a self-employed travel guide. He receives seven thousand dollars in tips through a third-party payment platform. His Form 1099 K shows total payments of fifty-five thousand dollars, but it does not separate the tips. Doug keeps daily logs that show the dates, customers, and tip amounts. Because he has proper records, he can use seven thousand dollars when calculating his qualified tips.
No Tax on Overtime
There is also a new deduction for qualified overtime for tax years 2025 through 2028. You can deduct the portion of your overtime pay that is above your regular rate of pay. This is the extra half that makes up time and a half under the Fair Labor Standards Act.
The maximum deduction is twelve thousand five hundred dollars, or twenty-five thousand for joint filers, and it phases out at the same income levels as the tip deduction. You can claim it whether or not you itemize your deductions.
Not every employee is covered by the overtime rules under the Fair Labor Standards Act, but if you are, these examples may help you understand how the deduction works. Overtime rules must follow the federal guidelines, meaning you were paid overtime for hours worked over 40 per week. If your state requires overtime when working more in a day than allowed at your regular rate, those don’t qualify. You may only include overtime over 40 hours per week.
Example one:
Andrew worked overtime, and his payroll statement shows five thousand dollars as the overtime premium. He can use that five thousand dollars when figuring out his qualified overtime compensation for 2025. Overtime premium is the extra 50% earned for overtime.
Example two: Andrew with a different breakdown
If Andrew’s payroll statement shows fifteen thousand dollars as total overtime pay, that amount includes his regular wages plus the overtime premium. In that case, the overtime premium is one-third of that amount. He can use five thousand dollars. When stubs show the total overtime at 1.5% of your usual rate, you only count the additional 50% of your wage, which is why you must divide the total overtime pay by three.
Example three:
Brad’s employer pays overtime at double his regular rate. Brad earned twenty thousand dollars of overtime pay. For tax purposes, only the portion that represents the premium is allowed, which is one-fourth of the total. Brad can use five thousand dollars.
The IRS has more examples available, and they will continue to update their website with additional information.
If you earned tips or overtime in 2025, these deductions may give you a meaningful tax benefit. Keeping accurate records will make it much easier when you file. If you ever feel unsure about how to apply these rules, reach out to a trusted tax professional so you can take advantage of these tax deductions and save on your tax due.
