Can I deduct my tip income and overtime pay on my 2025 tax return?

Yes — for tax years 2025 through 2028, the One Big Beautiful Bill Act (OBBBA) created two new above-the-line deductions that can reduce your taxable income even if you take the standard deduction:

Tip Income Deduction:

• You can deduct up to $25,000 of qualified tip income from your federal taxable income.
• Phases out once your modified adjusted gross income (MAGI) exceeds $150,000 (single) or $300,000 (married filing jointly).
• Applies to tips you receive in an industry where tipping is customary — restaurant servers, bartenders, hotel staff, salon workers, etc.
• Must be reported on your W-2 or 1099 — you cannot deduct unreported tips.

Overtime Pay Deduction:

• You can deduct up to $12,500 of qualified overtime pay ($25,000 for married filing jointly).
• The same income phase-out thresholds apply: begins phasing out above $150,000 (single) / $300,000 (MFJ).
• Applies to overtime paid at the federal rate (time-and-a-half or more for hours exceeding 40 per week under the Fair Labor Standards Act).

Important caveats:

• These are federal deductions. Most states have not adopted them — you likely still owe state income tax on tips and overtime.
• The deductions are claimed on your Form 1040 as above-the-line adjustments to income.
• The IRS released guidance (Notice 2025-75) clarifying eligible industries and how to calculate the deduction.
• Self-employed individuals receiving tips may also qualify, but the rules differ slightly.

For most tipped workers and hourly employees who work significant overtime, these deductions can meaningfully reduce your 2025 federal tax bill.