No tax on tips and overtime: what the new 2026 deductions actually say.
The One Big Beautiful Bill Act — signed July 4, 2025 — created brand-new deductions for tipped workers, hourly workers earning overtime, seniors, and car buyers. Here’s what the tips and overtime breaks really cover, and what they don’t.
The biggest tax law since 2017 was signed on July 4, 2025: the One Big Beautiful Bill Act (OBBBA). Among many other things, it made the Tax Cuts and Jobs Act’s individual tax brackets permanent — and created four brand-new deductions for 2025 through 2028, claimed on a new Schedule 1-A. The two getting the most attention: no tax on tips and no tax on overtime.
The tips deduction
- Up to $25,000 per taxpayer in qualified tips can be deducted from taxable income.
- Covers voluntary tips reported on a W-2 or 1099 — servers, bartenders, drivers, barbers, housekeeping staff, and other tipped occupations (the IRS published a qualifying-occupations list).
- Phases out when modified adjusted gross income exceeds $150,000 ($300,000 for married filing jointly).
The overtime deduction
- Up to $12,500 per taxpayer — and here’s the fine print people miss: it’s only the “half” in time-and-a-half. Your regular hourly pay is still fully taxable; the deduction covers the premium portion required under the Fair Labor Standards Act.
- Must be FLSA-qualified overtime reported on your W-2 or 1099.
- Same phaseouts: MAGI over $150,000 ($300,000 joint).
The part everyone should read twice
These are deductions, not credits. They shrink your taxable income; they don’t come off your tax bill dollar-for-dollar. They’re also temporary — 2025 through 2028, unless Congress extends them. And the most common way people will leave this money on the table: the deductions live on Schedule 1-A, a separate form many filers (and some tax software) will simply miss. Exact limits are still being shaped by IRS guidance, so confirm the current figures before you file.
One more warning, straight from the IRS’s 2026 Dirty Dozen list: scammers are already running “OBBB refund pitches” — cold texts and emails claiming you’re pre-approved for a new credit or fast payout under the new law. The deductions are real. The cold outreach about them is not.
What to do before you file
- Confirm the income is reported. Tips and overtime only qualify if they appear on a W-2 or 1099. Cash tips you never reported don’t count — and unreported tips are their own problem.
- Ask about Schedule 1-A by name. Don’t assume your preparer or software claims it. Ask: “Are my tips and overtime deductions on Schedule 1-A?”
- Don’t forget the other two. The same law created a $6,000 senior deduction for taxpayers 65+ and a $10,000 auto-loan-interest deduction — all on the same form, all through 2028.
The bottom line: if you earned tips or overtime in 2025 or 2026, make sure whoever prepares your return is claiming Schedule 1-A. It’s a four-year window — don’t sleep through it.
Alex Volkov, CPA is a New York-licensed CPA with over two decades in accounting, focused on resolving IRS tax problems — back taxes, liens, levies, garnishments, and audits — for individuals and businesses nationwide.
Earn tips or overtime?
Make sure you’re not leaving the new Schedule 1-A deductions on the table. Ask the question bar what applies to you — or call free and talk it through with a CPA.
Sources: Kitces.com, “Breaking Down The ‘One Big Beautiful Bill Act’ (OBBBA).” Read the analysis; TheStreet, “Taxes 2025-2026: ‘Big Beautiful Bill’ tax law changes and how they impact you.” Read the guide.