Changes to Taxation of Tips and Overtime in Tennessee

JOHNSON CITY, Tenn. — The Big and Beautiful Bill, effective through 2028, introduces significant changes like eliminating taxes on tips and overtime pay. However, navigating these modifications can be somewhat tricky.

The new regulations entail tax exemptions on tips and overtime pay, alongside exemptions on interest for specific auto loans, yet they impose higher taxes for seniors aged 65 and older.

Michelle Freeman Alexander, a professor at ETSU, suggests that checking your W-2 form, specifically Box 7, could provide some clarity in this situation.

“Many people are now driving for services like DoorDash and Uber, earning tips in the process. It’s becoming a common scenario, and I think we’ll see this trend grow,” she noted.

As coordinator of ETSU’s Master of Accounting program, Freeman-Alexander helps train students to offer free tax preparation services to the community.

Regarding auto loans, only the interest is tax-exempt if someone purchases a new car in 2025 that has been assembled in the U.S.; verification through the VIN number is necessary.

Check VIN | NHTSA VIN Decoder (After entering your VIN and model year, scroll to the bottom to see the factory location where your car was assembled.)

One of the areas that’s likely to confuse people the most pertains to overtime pay.

Not all overtime pay falls under the tax-free category. For instance, if you’re paid time-and-a-half for an extra hour, it’s the “half” that counts.

“Take an example where you earn $10 an hour, but for that hour of overtime, you get $15. You can only deduct the additional $5, which is half of your overtime compensation,” Freeman-Alexander clarified.

News 5’s Caleb Pearn inquired, “What if they receive more than half the time? Isn’t that still half?”

“We’re only halfway through,” Freeman-Alexander replied.

Learn more | Dr. Freeman-Alexander’s article published in the Tennessee CPA Journal

She pointed out that the correct figure can typically be found in Box 14 of the W-2 form.

“If your W-2 includes the information, it will appear in Box 14 with a specific code: TT for overtime pay and TP for tip income,” she explained.

However, not all W-2s will show this data; some individuals may need to refer back to their last pay stub of the year.

If both “straight overtime” and “overtime premium pay” are indicated, the correct amount to consider is the “premium pay.” If the overtime hours are listed together in a single line, calculation will be necessary.

“Employees need to maintain communication with their employers,” Freeman-Alexander advised. “If you know you’ve worked overtime but your W-2 doesn’t clarify the details, it’s essential to check back with your employer to determine what to report on your tax return.”