TIPS AND OVERTIME PAY
What’s new: Tips and overtime pay are exempted from income taxes up to certain limits whether you take the standard deduction or itemize on your return. For tax years 2025 through 2028, up to $25,000 of tip income is deductible for workers who “customarily and regularly” receive tips. The exemption is phased out at a MAGI of $150,000 (individuals) and $300,000 (married filing jointly). For hourly workers, up to $12,500 in overtime
pay is deductible within the same MAGI parameters. The deduction for overtime pay applies only to the bonus, so if you regularly get $20 per hour but $30 per hour when you work overtime, only $10 is part of the deduction. What to do: A regulations proposal released in September 2025 by the IRS lists nearly 70 qualifying jobs. Example: Waitstaff and baristas are likely to qualify, but it is unclear if jobs that attract occasional tipping will qualify. Note: Tipped workers who get the exemption still face the 7.65% combined
payroll taxes that fund Social Security and Medicare