Millions of workers eligible for new tip and overtime tax deductions
Workers can claim deductions up to $25,000 for qualified overtime and tip income through 2028
(InvestigateTV) — Tax filers who earn tips or overtime pay can claim new deductions on their 2025 federal income tax returns under temporary provisions that run through the 2028 tax year.
Workers who earn overtime pay can deduct up to $12,500 of qualified overtime compensation, or up to $25,000 for married couples filing jointly. The deduction phases out for taxpayers with modified gross incomes exceeding $150,000, or $300,000 for joint filers.
A similar deduction applies to tipped workers, with a maximum annual deduction of $25,000 that phases out at the same income thresholds.
Michael Joyce with CW Advisors said the deductions work differently from traditional itemized deductions.
“Another piece to that and this would apply to overtime as well, and this is a new part of the tax law, is a lot of people that earn tips when they file their taxes, they’re taking a standard deduction, but they can still deduct this,” Joyce said. “This is called a below the line deduction. So, you can still take the standard deduction rather than the itemized deduction but still take this below the line deduction for tips or overtime.”
The structure allows workers to claim both the standard deduction and the tip or overtime deduction simultaneously.
The IRS estimates about 6 million workers report tipped wages, making a significant number eligible for the new deduction.
The overtime and tip deductions are temporary provisions that apply only for tax years 2025 through 2028.
Major tax software companies have prepared for the changes, and additional information is available on IRS.gov.
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