The short answer
For tax years 2025 through 2028, workers can deduct up to $25,000 a year of qualified tips, and up to $12,500 of qualified overtime pay or $25,000 on a joint return, from the income subject to federal income tax. Both shrink once modified adjusted gross income passes $150,000, or $300,000 for a married couple. Social Security and Medicare taxes, and most state income taxes, still apply.
A deduction, not an exemption
Neither change makes tips or overtime tax-free. Both are deductions: you report all your pay as income as before, then subtract the qualifying amount on Schedule 1-A when working out your taxable income. The saving is the deduction multiplied by your tax rate, so $5,000 of qualifying overtime saves about $600 for someone in the 12% bracket, not $5,000.
Both deductions can be claimed whether or not you itemise, and they sit alongside the standard deduction rather than replacing it. Because the standard deduction already removes much low-wage income from federal tax, the workers who gain least are often those who earn least: a deduction is worth nothing to someone who owes no income tax.
Which tips count
Qualified tips are voluntary payments from customers in an occupation that customarily received tips before 2025, on a list the Treasury has published - waiting staff, bartenders, hairdressers, delivery drivers and many others. Cash tips, card tips and tips shared through a tip pool can all count if they are reported to your employer or on your return.
Mandatory service charges do not count, even when a restaurant passes them on to staff, because the customer had no choice about paying them. Self-employed workers in a listed occupation can claim the deduction too, with some exceptions for certain professional service businesses.
Which overtime counts
Only overtime that the federal Fair Labor Standards Act requires counts - generally hours beyond 40 in a work week for employees who are not exempt from overtime rules - and only the premium part of it. If you are paid time and a half, the extra half is qualified overtime; the regular rate for those hours is not.
So $1,500 of overtime pay at time and a half contains $500 of deductible overtime. Overtime paid under a state law, a union contract or an employer's own policy beyond what federal law requires does not count, and neither does extra pay for salaried workers who are exempt from the federal rules.
Who can claim, and the income limits
You need a Social Security number valid for employment, and a married person must file a joint return to claim either deduction. The tips deduction is capped at $25,000 a year; the overtime deduction at $12,500, or $25,000 for a married couple filing jointly.
Both are reduced by $100 for every $1,000 of modified adjusted gross income above $150,000, or above $300,000 on a joint return, so a worker with high total earnings may get only part of the deduction, or none of it.
What is still taxed, and what to check
Tips and overtime remain subject to Social Security and Medicare taxes, which fund the benefits you will draw later, and to state income tax unless your state has adopted a similar deduction of its own. They also still count as income for most benefit programmes: SNAP, Medicaid, housing assistance and others look at gross pay, not taxable income.
From 2026 employers must report qualified overtime separately on Form W-2, and must also report tips and the tipped occupation. For earlier pay, check your final pay stub or ask your employer for the figures, and keep your own record of the tips you receive.
What this does not tell you
This article explains the federal deductions in general terms; it is not tax advice. Your own saving depends on your whole return, including your filing status and your other deductions and credits.
None of our calculators models these deductions. The benefit calculators here count gross pay, which is also how most programmes see tips and overtime.
Official sources
What you can do next
Before the next filing season, find out from your employer how your overtime and tips will be reported, and keep your own log of tips. If your income is modest, check the Earned Income Tax Credit as well - it is often worth more than either deduction, and it is based on your total earnings, tips and overtime included.