No Tax on Overtime and Tips in Arizona? What the New Republican Spending Bill Proposes
By Stephanie Murray, Arizona Republic
A significant change may be on the horizon for workers in Arizona and across the nation regarding the taxation of overtime pay and tips. A new Republican-backed spending package, informally known as the “One Big Beautiful Bill Act,” includes provisions that would eliminate federal taxes on tips and overtime wages through the year 2028. ### The Background of the Bill
This comprehensive spending bill supports many policies championed by President Donald Trump and aims to make permanent various tax cuts established during his first term in office. The legislation also features major spending cuts in social programs such as Medicaid and the Supplemental Nutrition Assistance Program (SNAP) to balance the federal budget impact of these tax breaks. In addition, the bill allocates billions of dollars toward enhanced immigration enforcement measures.
Following a narrow approval by Senate Republicans on July 1, the legislation now moves to the House of Representatives for a final vote on Senate amendments before it can be presented to President Trump for his signature.
What Does the Bill Say About Taxing Tips?
Under the proposed law, tipped employees would receive a new tax deduction on their tip income each year through 2028. Specifically, the Senate version of the bill caps this deduction at $25,000 annually. This represents a softer stance than the House version, which featured a more generous deduction but placed stricter limits on high earners. In the Senate proposal, individuals earning over $150,000 per year face a reduced benefit from this tax break.
Currently, the Internal Revenue Service (IRS) treats all tips—whether cash, credit card, or tip-shared—as taxable income. According to the IRS, “All cash and non-cash tips received by an employee are income and are subject to Federal income taxes.”
Tax Breaks for Overtime Pay
In addition to tips, the bill introduces a tax deduction for overtime wages up to 2028. Presently, overtime pay is taxed the same as regular wages. The House version of the bill would exempt all overtime income from taxation, while the Senate’s iteration permits a tax deduction on the first $12,500 of overtime wages earned, again incorporating an income cap of $150,000. President Trump, during a 2024 campaign event in Tucson’s Linda Ronstadt Music Hall, emphasized his support for these changes. “It’s time for the working man and woman to finally catch a break and that’s what we’re doing,” Trump declared. “If you’re an overtime worker, if you’re past 40 hours a week … your overtime hours will be tax-free.”
When Could These Changes Take Effect?
The new tax rules could apply as soon as the bill becomes law. The two chambers of Congress have separately passed versions of the legislation and are working toward reconciliation. President Trump has urged Republicans to finalize the bill by the July 4 holiday, potentially bringing the measures into effect without delay.
Who Would Benefit?
These tax provisions would affect millions of Americans working in tipped and overtime-paying jobs. According to data shared by Representative Kevin Kiley (R-California), approximately 4 million people nationwide hold tipped occupations. A Pew Research Center survey found that 43% of Americans have personally worked in tip-related jobs at some point, with younger adults, women, and individuals from lower-income households more likely represented.
Conclusion
As lawmakers finalize the One Big Beautiful Bill Act, workers reliant on tips and overtime wages may soon enjoy significant federal tax relief for several years. However, questions remain about the bill’s broader fiscal impact, including cuts to vital social safety nets and increased immigration spending. Arizona workers will be watching closely as the state’s congressional delegation debates and votes on these consequential changes.
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