Two new federal deductions take effect beginning in tax year 2025, offering meaningful tax relief to workers who earn tips or overtime pay. Although they operate under separate rules, both deductions share similar structures and limitations. Below is a clear, combined overview to help taxpayers understand how these benefits work.

Temporary Tax Relief (2025–2028)

Both the No Tax on Tips and No Tax on Overtime deductions are temporary. They apply only to four tax years: 2025, 2026, 2027, and 2028. Unless extended by Congress, they will expire after 2028.

This temporary nature means taxpayers should take advantage of these deductions while they're available and plan accordingly for when they expire.

Reporting Requirements for 2025

For the first year of implementation (2025):

• Employers and payors are not required to separately report qualified tips or qualified overtime on Forms W-2, 1099-NEC, 1099-MISC, or 1099-K.
• If employers or payors do not provide a statement showing qualified tips or overtime, employees and independent contractors must keep their own records to substantiate the deduction.

Deduction Amounts

No Tax on Tips

• Allows up to $25,000 in qualified tips per tax return.

No Tax on Overtime

• Allows up to $12,500 for single filers.
• Allows up to $25,000 for married filing jointly (MFJ).

Who Can Claim the Deductions

Tips Deduction

• Available to employees and independent contractors who receive qualified tips

Overtime Deduction

• Available only to W-2 employees
• Independent contractors do not qualify
• Applies only to hours worked over 40 per week
• Only the premium portion of overtime pay qualifies. The base pay portion of overtime hours does not qualify

Filing Status Restrictions

Both deductions follow the same filing status rules:

• Not allowed for Married Filing Separately (MFS)
• Married taxpayers must file Married Filing Jointly (MFJ) to claim either deduction

Above the Line Deduction

Both deductions are above the line, meaning:

• They reduce Adjusted Gross Income (AGI)
• They are available to both itemizing and non-itemizing taxpayers
• Being above-the-line makes these deductions particularly valuable as they reduce AGI, which can affect eligibility for other tax benefits and credits

Income Phase Outs

Both deductions phase out at the same income levels:

• $150,000 MAGI for Single filers
• $300,000 MAGI for Married Filing Jointly

Taxpayers above these thresholds will see the deduction reduced or eliminated. The phase-out range is typically $25,000, meaning the deduction is completely phased out at $175,000 MAGI for Single filers and $325,000 MAGI for MFJ filers.