No Tax on Tips & Overtime (2026)

What these deductions really do

The headline is misleading in a specific and consequential way. Tips and overtime are not exempt from tax — they are deductions against income tax only, claimed on the new Schedule 1-A. Social Security and Medicare are still withheld from every dollar of tips and overtime, and self-employed recipients still owe self-employment tax on them. Someone earning $18,000 in tips saves income tax at their bracket, not the full amount, and their payroll tax is unchanged.

They are, however, available whether or not you itemise, which makes them genuinely useful to the people they target. The deductions apply for tax years 2025 through 2028 unless Congress extends them.

The caps and the phase-out

Tips are deductible up to $25,000. Overtime is capped at $12,500 for single filers and $25,000 for married couples filing jointly — and note that only the premium portion counts, meaning the extra half in time-and-a-half, not the whole overtime paycheque.

Both phase out above $150,000 of modified adjusted gross income ($300,000 filing jointly), losing $100 for every $1,000 above the threshold. Critically, the two are reduced separately rather than as a combined figure, so at $200,000 of MAGI a single filer loses $5,000 from each — leaving $20,000 of the tips deduction but only $7,500 of the overtime one. The tips deduction reaches zero at $400,000 for a single filer; the smaller overtime cap means it disappears at $275,000.

Who actually qualifies

Tips must be voluntary, paid in an occupation that customarily received tips before 2025, and properly reported. Mandatory service charges — the automatic 18% on a large table — are not tips and do not qualify, which surprises many restaurant workers. Overtime must be the premium required under the Fair Labor Standards Act; extra pay under a generous company policy that exceeds federal requirements does not count.

Self-employed people in tipped occupations can qualify too, which matters for delivery drivers, stylists renting a chair and beauty professionals working independently. For them the deduction is limited by net income from the business — and, as with everything else here, it does nothing to reduce the self-employment tax on those earnings.

What it is worth in practice

Because it is a deduction rather than a credit, the value is your marginal rate multiplied by the deduction. $25,000 of tips in the 22% bracket saves $5,500 — real money, but a long way from the $25,000 the name implies. A worker in the 12% bracket saves $3,000 from the same tips.

One practical consequence: your employer's withholding will not automatically account for this. If most of your income is tips, you may be over-withheld through the year and receive it back as a refund, or you can adjust your Form W-4. Either is fine; knowing which is happening is better than being surprised.

Frequently asked questions