Can You Benefit from Trump’s Tip and Overtime Tax Exemptions?
Written by
Josephine Nesbit
Edited by
Angela Corry
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President Donald Trump’s “Big Beautiful Bill” was signed into law on July 4 and is the largest tax cut in history for middle- and working-class Americans. Among the most talked-about provisions are exemptions on taxes for tips and overtime pay.
These changes could mean bigger paychecks for millions, but there are some caveats. Here’s how it could affect your wallet.
No Taxes on Tips
Under the previous rules, the IRS taxed all tips, cash or non-cash, as regular income. Starting with the 2025 tax year, employees who “customarily and regularly” receive tips can deduct up to $25,000 in qualified tips from their taxable income. That includes tips left directly by customers, added to a card or distributed through tip pools.
Not every tipped worker qualifies for the deduction. CNBC Make It reported that only workers whose jobs traditionally receive tips may qualify, such as food service and beauty industry workers. The full list will be published by the U.S. Treasury Department and Internal Revenue Service at a later date.
No Taxes on Overtime
Overtime wages also get a break. Employees earning time-and-a-half for hours worked beyond 40 in a week will no longer pay federal income taxes on those additional wages. Workers can deduct up to $12,500 or $25,000 on a joint tax return. However, only workers eligible for overtime pay under the Fair Labor Standards Act (FLSA) will qualify.
According to Ogletree, the deduction does not apply to overtime premiums required under state law or collective bargaining agreements. It also doesn’t apply to Social Security and Medicare taxes.
How It Will Affect You
For both tipped workers and overtime, eligibility begins to phase out for individuals making more than $150,000 per year, or $300,000 for joint filers. The deduction reduces by $100 for every $1,000 earned above the limit.
Fortune pointed out that both provisions have the potential to be worth thousands of dollars, but not everyone will get to enjoy these tax breaks, or to the same extent. How much it’s work depends on your tax situation and how much you earn.
There were only about four million tipped workers, or 2.5% of the U.S. workforce, in 2023, based on an analysis by Yale Budget Lab. The Tax Policy Center reported that only about 60% of tipped workers would receive a cut, adding up to $1,800 per household annually.
As for overtime workers, only 97.7 million were eligible for overtime protections under the FLSA in the same year, according to the Department of Labor.
These changes are temporary and are set to expire after 2028.
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