IRS Offers Guidance on New Tax Provisions for Tips and Overtime
The IRS has issued new guidance concerning the “no tax on tips” and “no tax on overtime” provisions outlined in the One Big Beautiful Bill Act (OBBBA), which will be relevant for workers claiming credits for the 2025 tax year.
This law, signed by former President Donald Trump in July, was passed by a Republican majority in Congress during party-line votes this summer. It includes the provisions that eliminate taxes on tips and overtime pay. The Treasury Department and IRS are currently assisting workers in understanding these deductions as stipulated by the law.
According to the IRS notice, taxpayers eligible for deductions related to tips and overtime should assess these amounts separately this year. Why? Because the standard Form W-2 and Form 1099 will not reflect income from these sources for the upcoming 2025 tax year.
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For taxpayers, this raises a few questions. The IRS has provided examples that clarify how income from tips and overtime can be reported or not reported for deductions.
Workers receiving appropriate tips can deduct up to $25,000 per year. However, for those with modified adjusted gross incomes exceeding $150,000 (or $300,000 for joint filers), this deduction will gradually reduce.
Interestingly, the IRS estimates that around 6 million workers report tipped wages. This deduction for tips is valid from the 2025 to 2028 tax years.
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The provision regarding exemption from tax on overtime allows individuals who earn overtime pay to deduct wages that are beyond their regular pay. Typically, this refers to the “half” portion for hours worked over the standard 40-hour week, depending on what’s reported on Forms W-2, 1099, or similar documents.
There is a cap on this annual deduction, set at $12,500 (or $25,000 for joint filers), and like the tip deduction, this is also phased out for higher income levels.
The Fair Labor Standards Act mandates that most employees must receive at least the federal minimum wage and overtime pay at one and a half times their regular hourly rate for every hour worked beyond 40 hours in a week.
However, it’s worth noting that some employees, particularly those earning at least $1,128 per week (or $58,656 annually) or those in specific job roles, may be exempt from these overtime regulations.
The IRS plans to revise income tax forms and instructions for the upcoming filing season to aid taxpayers in claiming these new credits.
As for when the 2025 tax year filing season will start, that hasn’t been officially announced yet, although it has typically begun in late January in recent years.
