Overview

• Workers can reduce their 2025 federal taxable income by up to $25,000 in tips and $12,500 in overtime under provisions effective through tax year 2028.
• Deductions phase out for individuals with modified adjusted gross income above $150,000 and for joint filers above $300,000, trimming benefits for higher earners.
• All reported tips and overtime remain subject to Social Security and Medicare payroll taxes despite the new income-tax deductions.
• The Treasury Department and IRS will issue detailed guidance to define which “customarily tipped” occupations qualify and how employers must report income.
• Critics warn the caps primarily aid middle- and upper-income workers who owe federal income tax while lower-wage tipped employees may see minimal benefit.