Imagine working hard for your tips and overtime pay, only to have a chunk of it taken away by taxes. Well, that's exactly what many workers have faced—until now. But here's where it gets controversial... The IRS has just released new guidance on the 'no tax on tips' and 'no tax on overtime' provisions of the One Big Beautiful Bill Act (OBBBA), and it’s stirring up quite the conversation. This law, signed by President Donald Trump in July 2025, promises significant tax breaks for workers, but there’s a catch—or two. Let’s break it down in a way that’s easy to understand, even if you’re not a tax expert.
First, let’s talk about the 'no tax on tips' provision. Under the OBBBA, workers who earn tips can now deduct up to $25,000 annually from their taxable income. Sounds great, right? But here’s the part most people miss... This deduction starts to phase out for individuals earning more than $150,000 (or $300,000 for joint filers). So, if you’re a high-earning server or bartender, you might not get the full benefit. The IRS estimates that about 6 million workers report tipped wages, and this deduction is available from 2025 to 2028. But there’s a wrinkle: since Form W-2 and Form 1099 won’t be updated to include tip income for the 2025 tax year, workers will have to calculate their deductions manually. The IRS provides examples in their guidance (https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025) to help, but it’s an extra step that could trip up some taxpayers.
Now, let’s shift to the 'no tax on overtime' provision. This allows workers to deduct the portion of their overtime pay that exceeds their regular wages—typically the 'half' in 'time and a half.' The maximum deduction here is $12,500 (or $25,000 for joint filers), with the same phase-out thresholds as the tip deduction. And this is where it gets even more interesting... Unlike many deductions, this one is available to both itemizing and non-itemizing taxpayers, making it accessible to a broader group. But here’s the kicker: not all workers qualify for overtime pay in the first place. The Fair Labor Standards Act (FLSA) requires overtime for most employees, but exemptions exist for salaried workers earning at least $1,128 per week ($58,656 annually) and certain occupational roles. So, while the deduction is generous, it’s not universal.
Here’s a thought-provoking question for you... Is this tax break truly a win for the working class, or does it disproportionately benefit higher earners who are already in a better financial position? Let’s discuss in the comments.
The IRS is working to update tax forms and instructions for the 2025 filing season, which typically starts in late January. While the exact start date hasn’t been announced yet, workers should stay tuned for updates to ensure they take full advantage of these deductions. In the meantime, if you’re someone who relies on tips or overtime, now’s the time to get familiar with these changes. And if you’re Charlie Gasparino, keeping an eye on the intersection of business, politics, and finance, you’ll want to sign up for On The Money to stay ahead of the curve. Thanks for reading, and don’t forget to share your thoughts below—this is one tax conversation you won’t want to miss!
