Workers Who Get Tips or Overtime: Don’t Miss This 2025 Tax Break
Do you work in an industry where you’re regularly tipped? Do you put in overtime on a frequent basis? If either of these applies to you, there’s a brand new tax break on the books for you in 2025.
With the One Big Beautiful Bill (OB3), new deductions may lower your taxable income. The new deductions are aimed directly at qualified tips and overtime pay, so make sure you take full advantage wherever possible.
New Tip Deduction Could Save Your Thousands
Anyone who receives actual tips could qualify for this deduction. It only applies to voluntary tips and not service charges and the amount must be reported properly, using the correct form. Keep in mind that if you’re self-employed, your deduction is limited to your net business income from the business where the tip was received.
Depending on your occupation, you could deduct up to $25,000. There are definite limits, though! You can’t get the tip deduction if you are using Married Filing Separately and phase out begins at $150,000 MAGI for Single/HOH filers or $300,000 for joint filers.
Working Overtime? There’s a Tax Break for That, Too
Putting in those extra hours, but don’t want to pay a lot more in taxes? The overtime deduction can help you drastically reduce how much you pay in taxes. Here’s the deal:
Your employer has to report overtime separately on W-2 forms. The deduction only applies to FLSA-mandated OT pay, which is usually 1.5x rate for hours over 40 per week. Make sure your OT fits these standards so you can file for that deduction.
How much can you save? Well, you can deduct up to $12,500 for a single filer or HOH. Joint filers may deduct up to $25,000!
Why Your AGI Won’t Change, But Your Tax Bill Might
Your adjusted gross income won’t change with these new 2025 tax breaks, but they will definitely make a change to what you owe in taxes. It’s certainly worth looking into if you make tips or work overtime (or both), since you’ll save money over the tax year. Since these benefits phase out in 2028, take advantage of them now.
To ensure you are getting the most out of the deductions, be sure your employer tracks and reports your overtime properly. You should also track all of your tip income and any overtime. Don’t wait until tax time to try and sort through all that! It will make you want to rip your hair out.
Ask Before You File
Do you qualify for a tax break? While you may be pretty sure you do, it is always best to consult with a tax expert as soon as possible. That gives you plenty of time to come up with a plan together and keep your taxable income as low as possible.
With a solid plan in hand, you’ll breeze through tax season, no problem! Contact Ask AnnaTax now to find out how to make these dedications work for you.
