What to Know About Trump’s ‘No Tax on Tips’ as IRS Releases New Guidance on Overtime Rules
Published Nov. 28, 2025
The Internal Revenue Service (IRS) has issued fresh guidance on new tax provisions introduced under the One Big Beautiful Bill Act (OBBBA), signed into law by President Donald Trump in July 2025. Among the most notable provisions are the “no tax on tips” and “no tax on overtime” rules, designed to provide tax relief for millions of American workers by allowing them to deduct certain types of income from their taxable earnings.
Background: The One Big Beautiful Bill Act
The OBBBA, passed by Republican-controlled Congress on a party-line vote and signed by President Trump, included significant changes to federal tax policy. Two key components that are drawing widespread attention are the deductions pertaining to tip income and overtime wages. This legislation targets workers who earn income from tips as well as those who receive overtime pay above their regular wages.
What the IRS Guidance Covers
The IRS’s new guidance officially outlines how taxpayers can apply the “no tax on tips” and “no tax on overtime” deductions for the 2025 tax year. Notably, the agency informed taxpayers that they might need to compute these deduction amounts separately, as the usual income reporting forms—Form W-2 and Form 1099—will not reflect tip and overtime income for this year.
Taxpayers are encouraged to review illustrative examples provided by the IRS to better understand how to claim these deductions, particularly given the variations between reported and unreported tip income.
No Tax on Tips: Key Details
- Annual Deduction Limit: Eligible workers can deduct up to $25,000 of qualified tip income annually.
- Income Phase-Out: The deduction is reduced gradually for taxpayers with a modified adjusted gross income exceeding $150,000, and for joint filers, the phase-out begins at $300,000.
- Scope: Approximately six million workers report tip wages and could benefit from this deduction.
- Duration: The tip income deduction is set to remain effective for tax years 2025 through 2028. This provision aims to lessen the tax burden on workers in industries heavily dependent on tipping, such as hospitality and food service.
No Tax on Overtime: What Workers Should Know
The law also introduces a deduction for overtime pay, allowing individuals to exclude from taxation the portion of eligible overtime compensation that exceeds their regular pay. This typically corresponds to the extra “half” portion in time-and-a-half overtime wages.
- Maximum Deduction: Workers can claim up to $12,500 annually, or $25,000 for joint filers.
- Income Limits: Similar to the tips deduction, the overtime deduction phases out at modified adjusted gross incomes of $150,000 for individuals and $300,000 for joint filers.
- Eligibility: The deduction applies whether taxpayers itemize deductions or not.
- Reporting: Eligible overtime pay must be reported via Form W-2, Form 1099, or other specified statements.
It is important to note that the Fair Labor Standards Act (FLSA) continues to mandate that most employees receive at least the federal minimum wage and overtime pay calculated at one and one-half times their standard pay rate for hours worked beyond 40 per week. However, certain salaried employees making $1,128 per week ($58,656 annually) or in specific occupations remain exempt from overtime rules.
IRS Updates and Tax Filing Season
The IRS also announced it is working on updating income tax forms and accompanying instructions to help taxpayers accurately claim these new deductions during the upcoming filing season. While the exact start date for the 2025 tax year filing season has yet to be announced, prior years typically saw tax filings commence in late January.
Taxpayers advised to stay informed and consult IRS resources or tax professionals to take full advantage of these provisions and ensure compliance.
This tax guidance and the recent legislative changes represent a significant shift in the federal taxation landscape, offering potential savings for millions of workers across the country as the new rules take effect.