Starting in 2025, millions of workers could see major tax savings thanks to the Big Beautiful Bill, signed into law by President Donald Trump. The new tax provisions eliminate federal income taxes on certain tip income and overtime wages, offering relief through 2028.
No taxes on tips for qualified workers
One of the most notable features of the new tax law is the no tax on tips deduction. Workers who earn tip income can deduct up to $12,500 if filing single or $25,000 if married filing jointly. To qualify, taxpayers must meet income limits. The full deduction is available for individuals earning a modified adjusted gross income (MAGI) of $150,000 or less, and for couples earning $300,000 or less. Above those amounts, the deduction decreases by $100 for every $1,000 of additional income.
This tax deduction can be claimed even if a taxpayer takes the standard deduction instead of itemizing. While employees are still required to report tip income and pay payroll taxes such as Social Security and Medicare, the federal income tax withheld on tips will be refunded at filing.
A wide range of jobs qualify for the new tax break. Workers in restaurants, hospitality, beauty services, transportation, entertainment, and home services may all be eligible. That includes bartenders, servers, musicians, DJs, hairstylists, barbers, hotel staff, rideshare drivers, electricians, plumbers, babysitters, and many others.
Overtime pay deduction
The Big Beautiful Bill also creates a new overtime tax deduction. Employees who work more than 40 hours per week and earn overtime pay can deduct federal income taxes on those wages, whether or not they itemize. Overtime pay will still be subject to payroll tax withholding, but those federal taxes will be refunded when workers file their income tax return.
On average, overtime employees are expected to save $1,400 to $1,750 per year in federal income taxes. This benefit, like the tip deduction, applies for tax years 2025 through 2028.
Who benefits most from the new tax breaks
The new deductions are designed to lower the tax burden on workers who rely on tips and overtime as a significant part of their income. Households reporting tip income may see an average annual savings of about $1,800 under the new tax law.
However, lower-income households may not see as much benefit since many already owe little to no federal income tax. The greatest savings will go to middle- and higher-income workers who regularly earn tips or overtime.
Bottom line on the Big Beautiful Bill
The Big Beautiful Bill introduces historic tax breaks for tip earners and overtime workers, offering new deductions that could save qualifying taxpayers thousands of dollars each year between 2025 and 2028. Workers in tipped industries and those logging long hours should review IRS guidelines carefully to determine eligibility and ensure they claim the full benefit.
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