IRS Provides Guidance on New Tax Provisions
The IRS has issued new guidance regarding the “no tax on tips” and “no tax on overtime” provisions included in the One Big Beautiful Bill Act (OBBBA) for workers eligible to claim credits for the 2025 tax year.
Signed into law by President Donald Trump in July, the OBBBA was passed by a Republican-majority Congress during party-line votes this summer. This legislation aims to benefit workers by eliminating taxes on tips and overtime pay.
In light of the new law, the Treasury Department and IRS are currently helping workers figure out their deductions. However, this year, taxpayers who qualify for tips and overtime deductions will likely need to calculate these amounts separately, since Form W-2 and Form 1099 will not include that income for the upcoming tax year.
According to IRS guidance, examples are provided to illustrate how tip income and overtime deductions function based on reported or unreported earnings.
Under the OBBBA, eligible workers can deduct up to $25,000 in tips each year, though this deduction phases out for those with a modified adjusted gross income that exceeds $150,000 ($300,000 for joint filers). The IRS anticipates that around 6 million workers report receiving tipped wages, with these deductions being valid from 2025 to 2028.
The provision on overtime pay exemptions enables individuals to deduct wages that go beyond their regular pay for the overtime hours worked. This typically refers to the “half” portion of overtime pay, reported on the various income forms.
The annual deduction for overtime is capped at $12,500 (or $25,000 for joint filers), gradually phasing out for taxpayers whose modified adjusted gross income exceeds $150,000 (or $300,000 for joint filers). Notably, this deduction is accessible to both itemizers and non-itemizers.
The Fair Labor Standards Act mandates that most employees be paid at least the federal minimum wage for all hours worked, in addition to receiving overtime pay of at least one and a half times their usual wage for hours exceeding 40 hours a week.
It’s worth mentioning that certain employees may be exempt from these overtime regulations, particularly if they earn at least $1,128 weekly or $58,656 annually, or if they fall into specific occupations.
The IRS has announced updates to income tax forms and instructions to assist taxpayers in claiming these credits. Although the precise start date for filing in the 2025 tax year hasn’t been revealed yet, it has typically commenced in late January in previous years.
