IRS Guidance on One Big Beautiful Bill Act Tax Provisions
The IRS has issued new information regarding the tax-free and overtime provisions under the One Big Beautiful Bill Act (OBBBA), which workers can use for the 2025 tax year.
OBBBA was signed into law by President Donald Trump in July, following its passage through Congress with a Republican majority this summer.
This legislation provides “tax exemptions for tips” and “tax exemptions for overtime.” The Treasury Department and IRS are currently releasing guidance to assist workers in figuring out their deductions as stipulated in the law.
According to the IRS notice, taxpayers eligible for deductions related to tips and overtime may need to calculate these amounts separately. This is because the standard Form W-2 and Form 1099 won’t reflect the income from tips and overtime for the upcoming tax year.
There are examples outlined in the IRS guidance that illustrate how tip income and overtime deductions work, both for reported and unreported earnings.
Eligible workers who receive tips can deduct up to $25,000 each year, but this deduction phases out for those with a modified adjusted gross income exceeding $150,000 ($300,000 for joint filers).
The IRS estimates around 6 million workers report tipped wages, and this deduction will be applicable from the tax years 2025 to 2028.
The “Tax Exemption for Overtime” provision allows individuals earning eligible overtime to deduct any salary above their regular pay as reported on the requisite forms. Specifically, this applies to the “half” portion of overtime pay for hours exceeding regular schedules.
For the annual deduction, the cap is set at $12,500 (or $25,000 for those filing jointly), with phase-out limits for modified adjusted gross incomes exceeding $150,000 (or $300,000 for joint filers). Interestingly, this deduction is accessible to both itemized and standard taxpayers.
It’s important to note that the Fair Labor Standards Act mandates most employees must receive at least minimum wage for all hours worked, and any overtime worked—defined as exceeding 40 hours in a week—should be compensated at no less than one and a half times their regular pay rate.
However, not all employees are covered by these overtime provisions. Exemptions apply to those earning at least $1,128 each week or $58,656 annually, as well as certain job categories.
The IRS has indicated it is revising tax forms and instructions this filing season to assist taxpayers in claiming these credits.
While a start date for the 2025 tax year filing season hasn’t been officially announced yet, it has generally begun in late January in previous years.
