What changed
The One Big Beautiful Bill Act, signed in July 2025, created two new deductions for the tax years 2025 to 2028. They’re deductions, not exemptions: your tips and overtime still appear on your W-2 and in your income, but you subtract the qualifying amount when you work out your taxable income.
You can claim them whether you take the standard deduction or itemize.
No tax on tips
How much: up to $25,000 a year per tax return. A married couple filing jointly shares one $25,000, even if both get tips.
Which tips count:
- Tips customers choose to give, in cash or by card, that you report to your employer.
- Only in a job on the IRS list of tipped occupations. The final list, published in April 2026, has 71 occupations, including restaurant servers and bartenders.
- Tips you get through a tip pool count, unless you’re a manager or supervisor.
What doesn’t count: service charges, automatic gratuities and other amounts customers have to pay, even if they’re passed on to staff, unless the customer could choose to change or not pay them.
Self-employed? You can deduct tips from your own business, but not more than that business’s profit.
No tax on overtime
How much: up to $12,500 a year, or $25,000 on a joint return.
What counts: only the premium part of overtime the federal Fair Labor Standards Act requires. That’s the extra half in time-and-a-half for hours over 40 in a week. If you earn $20 an hour and $30 for an overtime hour, $10 of each overtime hour counts.
What doesn’t: your regular rate for those hours, double time, and overtime paid only because of a state law or union contract (daily overtime, for example).
How much will I save?
The deduction saves tax at your own rate. At the 12% rate, that’s $120 for every $1,000 you deduct.
- Server: $25,000 wages + $15,000 tips $1,730 less
- Without the deduction: $2,620 With it: $890
- Hourly worker: $25 an hour + 200 overtime hours $300 less
- Without the deduction: $4,960 With it: $4,660
Tips save more, because all qualified tips count; for overtime, only the extra half does
Only income tax changes. Social Security and Medicare are still taken from tips and overtime.
Who can claim
- You need a Social Security number that’s valid for work.
- If you’re married, you must file a joint return.
- Both deductions shrink once your income passes $150,000, or $300,000 on a joint return: by $100 for every $1,000 above it.
How to claim
You claim both on Schedule 1-A, which goes with your Form 1040.
From 2026, your W-2 shows the amounts:
| What | Where on your W-2 |
|---|---|
| Cash tips | Box 12, code TP, with your occupation code in box 14b |
| Overtime premium | Box 12, code TT |
If box 14b only shows 000, your tips aren’t from a listed occupation and don’t qualify. For overtime, from 2026 you can only deduct the amount in code TT.
Unless your withholding has been adjusted, the tax you save usually comes back as a bigger refund when you file.
Does my state follow it?
Most states don’t. They tax tips and overtime as usual. For 2026:
| State | Tips | Overtime |
|---|---|---|
| Alabama | No | Its own deduction, up to $1,000 |
| Arizona | Yes | Yes |
| Colorado | Yes | No |
| District of Columbia | Yes | Yes |
| Georgia | Its own, up to $1,750 | Its own, up to $1,750 (full-time hourly workers) |
| Hawaii | Yes | No |
| Idaho | Yes | Yes |
| Indiana | Yes (2026 only) | Yes (2026 only) |
| Iowa | Yes | Yes |
| Michigan | Yes | Yes |
| Montana | Yes | Yes |
| New York | Yes | No |
| North Dakota | Yes | Yes |
| Oregon | Yes | Yes |
All other states with an income tax tax tips and overtime as usual. Nine states don’t tax wages at all, including Texas and Florida. DC’s rules for 2026 rest on legislation that was still being finalized in late 2026.
Work it out for yourself
Our no tax on tips calculator and no tax on overtime calculator show your federal and state savings. To see your whole refund, use our tax refund calculator.