Overtime and Tip Tax Calculator

The One Big Beautiful Bill introduces new tax deductions for qualified overtime compensation and qualified tips for the 2025 tax year. These deductions allow workers to reduce their taxable income by up to $12,500 for overtime pay (single filers) or $25,000 (married filers), and up to $25,000 for tip income, regardless of filing status.

All workers who receive overtime pay and/or tip income qualify for these deductions, regardless of their income level. However, the deductions phase out for higher-income earners. For single filers, the phase-out begins at $150,000 MAGI, and for married filers, it begins at $300,000 MAGI.

For every $1,000 your Modified Adjusted Gross Income (MAGI) exceeds the threshold ($150,000 for single, $300,000 for married), your total deduction is reduced by $100. This means the deductions are completely phased out when MAGI reaches $275,000 for single filers or $550,000 for married filers.

Qualified overtime compensation includes any overtime pay you receive from your employer, up to the annual limit of $12,500 for single filers or $25,000 for married filers. This applies to all overtime hours worked, regardless of your regular hourly rate.

Qualified tips include all tip income you report to the IRS, up to the annual limit of $25,000. This includes tips received in cash, credit card tips, and any other gratuities you earn while working in tipped positions.

Your tax savings depend on your marginal tax rate. For federal taxes, multiply your total deduction (overtime + tip deductions) by your federal tax rate. For state taxes, if your state conforms to federal definitions, multiply by your state tax rate. For example, if you have $15,000 in deductions and are in the 22% federal bracket, you'll save approximately $3,300 in federal taxes.

It depends on your state. Some states automatically conform to federal tax law changes, while others may need to pass their own legislation. Check with your state's tax authority or a tax professional to determine if these deductions apply to your state income tax.

These deductions are effective for the 2025 tax year, meaning they apply to income earned in 2025 and reported on your 2025 tax return filed in 2026.

The IRS will likely provide specific forms or instructions for claiming these deductions. You'll need to report your overtime income and tip income separately, and the deductions will be calculated based on the limits and phase-out rules. Consult with a tax professional or wait for official IRS guidance.

No, you can claim both the overtime deduction and the tip deduction if you qualify for both. The limits are separate, so you could potentially deduct up to $37,500 ($12,500 overtime + $25,000 tips) as a single filer, or $50,000 ($25,000 overtime + $25,000 tips) as a married filer, subject to the phase-out rules.

No, only income tax is waived on these amounts. Overtime and tips remain subject to Social Security and Medicare taxes as before. The deductions only apply to federal (and potentially state) income tax calculations.

These deductions expire after 2028, so they are available for the 2025, 2026, 2027, and 2028 tax years.

The calculator uses the following methodology: 1) Calculates your MAGI (regular income + overtime + tips), 2) Determines eligible deductions (up to $25,000 for tips, up to $12,500/$25,000 for overtime based on filing status), 3) Applies phase-out rules if your MAGI exceeds thresholds, 4) Multiplies the final deduction by your tax rates to calculate savings.

The primary source is H.R.1 - 119th Congress (2025-2026): One Big Beautiful Bill Act from Congress.gov. Additional guidance is available from the IRS and expert analysis from financial publications like Bankrate. Always consult with a tax professional for specific advice about your situation.