IRS Guidance on Tax Deductions for Workers
As the tax season draws near, the IRS has shared new guidance regarding federal deductions that workers can claim for tips and overtime pay, a result of President Trump’s recent legislation.
This guidance outlines how to report these deductions for the upcoming tax year. Yet, tax experts warn that workers might still encounter confusion when filing. The deductions allow eligible workers to claim up to $25,000 in “qualified tips” from 2025 through 2028. However, this break will start phasing out once a modified adjusted gross income surpasses $150,000 (or $300,000 for married couples filing jointly).
In addition, Trump’s tax cuts for eligible overtime pay provide deductions of $12,500 for single filers and $25,000 for joint filers, again with the same income phaseout threshold. This provision is also set to take effect from 2025 to 2028.
Workers can legally deduct tips and overtime pay when their income is reported on specific information returns like Forms W-2 and 1099s. The IRS strongly encourages employers to complete this reporting, but for the 2025 tax year, it won’t be mandatory, according to Thomas Gorczynski, a tax agent based in Tempe, Arizona. He mentioned that without this information, reporting could become quite complex for employees.
It’s estimated that about 6 million workers report tipped wages. Nationally, around 6% of workers are expected to report overtime pay in 2024, based on insights from a business organization. As these individuals prepare to navigate the potential deductions for tips and overtime for returns due in 2026, some worry about the possible confusion these provisions might cause come tax time.
Temporary Relief for Tipped Workers
The new IRS guidance also offers “transitional relief” for certain workers in the specified service trades or businesses (SSTB). According to the tax law introduced by Trump in 2017, specific industries like healthcare, law, and financial services are limited in their eligibility for a 20% deduction.
While SSTB workers usually cannot take advantage of the new tip deductions from the latest legislation, there is temporary qualification for some until the IRS finalizes its rules. Gorczynski cautioned that this exemption should not be assumed as a permanent change.
In essence, there’s a temporary exemption in place for some workers in specified service roles, but if their eligibility changes, they might encounter unexpected tax implications after 2026.
