Big Beautiful Bill
No tax on overtime
The “Big Beautiful Bill” only eliminates some tax on overtime pay.
The tax break only pertains to a portion of overtime pay, or the “‘half’ of ‘time and a half pay’, required under the federal Fair Labor Standards Act. For example, if a worker makes $40 an hour, then their time-and-a-half overtime would amount to $60 an hour. Of that $60, only $20 (the “half” part of “time and a half”) remains tax-free.
- Additionally, the “no tax on overtime” is a federal income tax change only. State and local income taxes still apply (unless your state separately conforms), and Social Security and Medicare taxes are still withheld on all wages, including overtime.
- there is also a cap on how much overtime pay remains tax-exempt: $12,500 per person annually, or $25,000 for people filing together. Earners who make more than $150,000 (or $300,000 combined between two people filing together) are not eligible for tax-free overtime pay.
No tax on tips
• New deduction: Effective for 2025 through 2028, employees and self-employed individuals may deduct qualified tips received in occupations that are listed by the IRS as customarily and regularly receiving tips on or before December 31, 2024, and that are reported on a Form W-2, Form 1099, or other specified statement furnished to the individual or reported directly by the individual on Form 4137.
o “Qualified tips” are voluntary cash or charged tips received from customers or through tip sharing.
o Maximum annual deduction is $25,000; for self-employed, deduction may not exceed individual’s net income (without regard to this deduction) from the trade or business in which the tips were earned.
o Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
• Taxpayer eligibility: Deduction is available for both itemizing and non-itemizing taxpayers.
o Self-employed individuals in a Specified Service Trade or Business (SSTB) under section 199A are not eligible. Employees whose employer is in an SSTB also are not eligible.
• Reporting: Employers and other payors must file information returns with the IRS (or SSA) and furnish statements to taxpayers showing certain cash tips received and the occupation of the tip recipient.
• Guidance: By October 2, 2025, the IRS must publish a list of occupations that “customarily and regularly” received tips on or before December 31, 2024.
o The IRS will provide transition relief for tax year 2025 for taxpayers claiming the deduction and for employers and payors subject to the new reporting requirements.
Senior Deduction
Effective for 2025 through 2028, individuals who are age 65 and older may claim an additional deduction of $6,000. This new deduction is in addition to the current additional standard deduction for seniors under existing law.
o The $6,000 senior deduction is per eligible individual (i.e., $12,000 total for a married couple where both spouses qualify).
o Deduction phases out for taxpayers with modified adjusted gross income over $75,000 ($150,000 for joint filers).
• Qualifying taxpayers: To qualify for the additional deduction, a taxpayer must attain age 65 on or before the last day of the taxable year.
• Taxpayer eligibility: Deduction is available for both itemizing and non-itemizing taxpayers.
o Taxpayers must:
include the Social Security Number of the qualifying individual(s) on the return, and
file jointly if married, to claim the deduction.