No tax on tips and no tax on overtime: the 2026 deduction, who qualifies, how much

Two new federal income tax deductions, from the One Big Beautiful Bill Act (OBBBA), apply to tax years 2025 through 2028: up to $25,000 of qualified tips and up to $12,500 ($25,000 married filing jointly) of qualified overtime premium pay can come off your taxable income, whether or not you itemize. Neither is a payroll-tax break — you still pay Social Security and Medicare tax on every dollar of tips and overtime, and your paycheck withholding doesn't change unless you adjust it yourself. Both are claimed on the new Schedule 1-A when you file. Every figure below comes from our tips and overtime deduction calculator, built from the statute (26 U.S.C. §§224–225) and the 2025 Schedule 1-A worksheet.

The basics

• Qualified tips: deduct up to $25,000 a year. The cap is flat — it doesn't change for single vs. joint filers (26 U.S.C. §224(b)(1)).
• Qualified overtime: deduct up to $12,500 a year single/head of household, $25,000 married filing jointly — and only the "half" premium portion of federally required time-and-a-half pay, not your whole overtime paycheck (26 U.S.C. §225(a)–(b)).
• Both phase out once your modified AGI (MAGI) passes $150,000 single/head of household or $300,000 joint — same thresholds for both deductions.
• Married filing separately can't claim either deduction, no matter the income or tip/overtime amount (26 U.S.C. §224(f), §225, requiring a joint return for married taxpayers).
• You need a valid Social Security number to claim either one.
• These are above-the-line deductions — you get them whether you take the standard deduction or itemize.

Who qualifies for the tips deduction

A tip only counts if all of these are true:

• Your occupation is on Treasury's list of jobs that customarily and regularly received tips on or before December 31, 2024. Treasury's proposed list (September 2025) named around 68 occupations in eight categories — 100s Beverage & Food Service (bartenders, wait staff, cooks, bakers...), 200s Entertainment & Events (gambling dealers, musicians, DJs, ushers...), 300s Hospitality & Guest Services (bellhops, concierges, housekeepers...), 400s Home Services (home repair, landscaping, cleaning...), 500s Personal Services (event planners, photographers, nannies, tutors...), 600s Personal Appearance & Wellness (hairstylists, barbers, massage therapists, tattoo artists...), 700s Recreation & Instruction (golf caddies, tour guides, sports instructors...), and 800s Transportation & Delivery (valets, rideshare drivers, movers...). The final regulations (T.D. 10044, effective June 12, 2026) expanded this slightly — adding visual artists, floral designers and gas pump attendants — so check the current list at IRS.gov/TippedOccupations before you rely on it; it isn't reproduced in full here because it has already changed once.
• The tip was voluntary — paid without the customer being required to, not negotiated, and the amount set by the payer, not a contract. An automatic service charge (an 18% gratuity added to a large party's bill) doesn't count, even in a job that's on the list; only a voluntary amount on top of it would.
• The trade or business isn't a "specified service trade or business" (an SSTB, the same list used for the Section 199A pass-through deduction: health, law, accounting, performing arts, consulting, athletics, financial services and a few others). If you're an employee, this is tested against your employer's business, not your job title. This is the gotcha: "Musicians and Singers," "Entertainers and Performers" and "Dancers" are explicitly on Treasury's tipped-occupation list, but a self-employed musician's own business is "performing arts" — an SSTB — so their tips don't qualify. The same musician, tipped while employed by a hotel to play in its lobby bar, does qualify: the employer (a hospitality business) isn't an SSTB, even though the work is identical. Nothing in the healthcare field is on the tipped-occupation list at all, so this rarely comes up for nurses or other clinical staff — they're excluded by not being on the list in the first place, not by the SSTB rule.

Who qualifies for the overtime deduction

This one is narrower than it sounds:

• You must be a non-exempt employee under the FLSA — covered by, and not exempt from, the Fair Labor Standards Act's overtime rule (29 U.S.C. §207). Many salaried roles (executive, administrative, professional, outside sales, some computer employees, depending on duties and salary level) are FLSA-exempt and get nothing here, even if they regularly work extra hours.
• Only the extra half of federally required time-and-a-half counts. If your regular rate is $20/hour and you're paid $30/hour for an overtime hour, $10 of that hour's pay is qualified overtime compensation — not the full $30, and not the $20 either.
• Only overtime required by federal law qualifies. If your state requires overtime in situations the FLSA doesn't (daily overtime after 8 hours in California, for example) or your contract pays extra beyond what either law requires, that extra isn't "qualified overtime compensation" (IRS Notice 2025-69).
• There's no occupation list for this one — it runs on FLSA coverage, not the job title.

The phase-out math — and a rounding rule most summaries get wrong

Above the MAGI threshold, each deduction is cut by $100 for every $1,000 of MAGI over it. The Schedule 1-A worksheet does this by dividing the excess MAGI by $1,000 and rounding down to a whole number before multiplying by $100 — not rounding up for a partial $1,000, as some explainers describe it. Concretely: $150,450 of MAGI over the threshold (single) is divided by $1,000 to get 150.45, which is reduced to 150, then multiplied by $100 for a $15,000 cut — the extra $450 costs nothing until MAGI crosses the next full $1,000.

Because the cap is $25,000 for tips and the reduction is $100 per $1,000, the tips deduction reaches exactly $0 once MAGI is $250,000 over the threshold: $400,000 MAGI single/head of household, $550,000 joint. The overtime deduction's smaller $12,500 single cap zeroes out $125,000 over the threshold — $275,000 MAGI single/head of household — while the joint $25,000 cap zeroes out at the same $550,000 as tips.

Five worked examples

Bartender: bartending is on Treasury's tipped-occupation list and a bar isn't an SSTB, so all $18,000 qualifies; $55,000 of MAGI is nowhere near the $150,000 threshold, so there's no phase-out — the full $18,000 is deductible.

Warehouse worker: non-exempt FLSA employees get the "half" premium on their overtime hours; $9,400 of qualified premium pay is below both the $25,000 joint cap and the $300,000 joint threshold, so all of it is deductible.

Server in phase-out: $320,450 of MAGI is $170,450 over the $150,000 single threshold. $170,450 ÷ $1,000 = 170.45, rounded down to 170, times $100 is a $17,000 cut. The $22,000 of tips (under the $25,000 cap) minus $17,000 leaves a $5,000 deduction.

Same server, further over: at $420,000 of MAGI, the excess is $270,000 — past the $250,000 that fully erases a $25,000 cap. Both the $20,000 tips (capped first at $25,000, then wiped out by a $27,000 reduction) and the $10,000 overtime (capped at $12,500, also wiped out) hit zero. Nothing to deduct, even though the tips and overtime were real income.

Couple just past the threshold: $310,000 of joint MAGI is $10,000 over the $300,000 threshold — exactly 10 steps of $1,000, a flat $1,000 cut to both deductions. $15,000 of tips becomes a $14,000 deduction; $8,000 of overtime premium becomes $7,000. The same $1,000 cut applies to both because they share the same MAGI and threshold.

The new W-2 boxes

Forms for tax year 2025 didn't change — Notice 2025-69 gave employers transition relief, so 2025 W-2s, 1099-NECs, 1099-MISCs and 1099-Ks look the same as before, and you worked out your deductible tip and overtime amounts from your own pay records. Starting with 2026 Forms W-2, two new box 12 codes report the amounts for you: TP for qualified tips, TT for qualified overtime compensation, plus a new box 14b for your three-digit Treasury Tipped Occupation Code. None of these boxes decide your actual deduction — if your MAGI triggers the phase-out, the deductible amount on Schedule 1-A is smaller than the box 12 figure, and you (or your software) still have to run the reduction.

Rules to get right

• This lowers taxable income, not your tax bill dollar-for-dollar — it's a deduction, not a credit. A $5,000 deduction in the 22% bracket saves about $1,100 of tax, not $5,000.
• It doesn't touch Social Security or Medicare tax, which are charged on the full tip and overtime amounts either way.
• Married filing separately gets nothing from either deduction — not a smaller amount, zero.
• The $150,000/$300,000 thresholds and the $25,000/$12,500/$25,000 caps are fixed dollar amounts in the statute for 2025–2028; nothing in 26 U.S.C. §§224–225 indexes them for inflation.
• Both deductions end after tax year 2028 unless Congress extends them (26 U.S.C. §224(h), §225 sunset).
• Being on Treasury's tipped-occupation list isn't enough by itself — your employer's business (or your own, if self-employed) also has to not be a specified service trade or business.

Run your own tips and overtime numbers in the tips and overtime deduction calculator, then see what the deduction is actually worth in tax dollars in the 2026 income tax calculator: enter your income there as your usual AGI minus this deduction amount, and it will work out the standard deduction and tax on what's left. This is an illustration of the mechanics, not tax advice; a real return has details (other deductions, credits, state tax) these examples leave out.