The U.S. Treasury and IRS have rolled out new guidance that changes how millions of workers will file taxes in 2025. The goal is to cut taxes on common forms of income like tips and overtime. The catch is that the first year comes with a transition period that shifts more responsibility to you. It sounds messy, but once you see how it works, it becomes easier to plan ahead.
These changes come from Trump’s One, Big, Beautiful Bill Act, which created two new deductions. One covers tips, and the other covers overtime premium pay. Both run from 2025 through 2028.
New Deductions for Tips and Overtime
RDNE / Pexels / The ‘No Tax on Tips’ deduction gives eligible workers the chance to remove as much as $25,000 in qualified tips from federal taxable income.
It targets jobs where tipping is common, and it offers real relief for people whose pay depends on daily customer traffic. The deduction shrinks once your income rises past $150,000 for single filers or $300,000 for joint filers, so higher earners do not get the full break.
The ‘No Tax on Overtime’ deduction focuses on the premium part of overtime pay, the extra half that federal law requires after 40 hours in a week. Individuals can deduct up to $12,500, while joint filers can claim up to $25,000. The same income limits apply here, and only the federal Fair Labor Standards Act rules count.
If your employer pays double time or follows a more generous state rule, that extra amount does not qualify.
These deductions apply whether you itemize or take the standard deduction. That means every eligible worker can use them. To claim them, you must include a valid Social Security number. Married couples must file jointly if they want to use these breaks. The rules seem simple, yet they depend heavily on how your job tracks and reports your income.
Who Qualifies for These New Breaks?
Kampus / Pexels / The tips deduction only covers voluntary tips from customers. Cash tips, card tips, and tip pool amounts all count. Mandatory service fees do not count because they act like regular wages.
The IRS lists jobs that regularly earn tips, such as restaurant servers, bartenders, hotel staff, hairstylists, and casino employees.
If your job falls into this group, your tip income likely qualifies.
However, there are limits. Self-employed people in a Specified Service Trade or Business cannot use the deduction. Employees inside those same business types cannot use it either. This rule prevents certain high-income service fields from claiming a benefit meant for hourly workers who depend on tipping for a steady income.
How to Claim These Deductions in 2025?
The IRS calls 2025 a transition year. That means tax forms and employer reporting systems have not fully caught up to the new rules. Your W-2 will look the same as usual, and you will not see a special box breaking out qualified tips or overtime. Employers also receive penalty relief for not creating separate statements in 2025.
Since your employer will not do it for you this year, you have to calculate your own qualified amounts. The IRS guidance shows how to do it using numbers you already receive on your pay stubs. For overtime, the math isolates the premium part of your pay.
If your annual overtime total is $15,000 and includes both regular pay and premium pay, you can claim one-third of it, which is $5,000. If you receive double time and earn $20,000 in overtime, you can claim one-fourth of it, which is also $5,000.
The tips calculation is simpler. You can rely on Box 7 of your W-2, which lists Social Security tips. If you reported extra tips on Form 4137, you can add that number too. Self-employed workers must keep their own logs, since they do not get W-2 forms.
Remember, the IRS plans to tighten the process in 2026. A new W-2 box will list qualified overtime compensation, which should make the calculation easier for employees.
