# What is my overtime and tip tax cut?

Computes the federal no-tax-on-tips and no-tax-on-overtime deductions for tax years 2025 to 2028, with the income phase-out, and the tax they save at your tax rate.

- Page: https://www.acalculator.org/finance/overtime-and-tip-tax-calculator
- JSON spec: https://www.acalculator.org/finance/overtime-and-tip-tax-calculator.json
- Version: 4879aa54c4e5

## Default answer

Example with the default inputs (Tax year 2026, Filing status Single or head of household, Other income $50,000.00, Overtime pay $10,000.00, The overtime amount is All my overtime pay, Tips $5,000.00, Federal tax rate 22%, My state also allows these deductions No): With $5,000.00 in tips and $10,000.00 of overtime pay, you deduct $8,333.33 and save $1,833.33.

## Inputs

| Key | Label | Description |
| --- | --- | --- |
| year | Tax year | The tax year. The deductions exist for 2025 to 2028. |
| filingStatus | Filing status | Single (also head of household or surviving spouse), married filing jointly, or married filing separately. |
| regularIncome | Other income | All other income for the year: regular wages and anything else in your adjusted gross income. |
| overtimeIncome | Overtime pay | Overtime pay for the year, either all of it or only the extra half, as chosen below. |
| otPart | The overtime amount is | All overtime pay at time and a half (one third of it is the extra half that qualifies), or only the extra half, as your employer reports it. |
| tipIncome | Tips | Qualified tips for the year, received in an occupation on the IRS list of tipped occupations. |
| federalTaxRate | Federal tax rate | Your top (marginal) federal income tax rate. |
| includeStateTax | My state also allows these deductions | Whether to count a state income tax saving at the state rate below. |
| stateTaxRate | State tax rate | Your top state income tax rate, if your state follows these deductions. |

## Outputs

| Key | Label | Description |
| --- | --- | --- |
| savings | Tax you save | The federal saving plus the state saving, if counted. |
| deduction | Total deduction | The tips deduction plus the overtime deduction. |
| tipDeduction | Tips deduction | Qualified tips up to $25,000, less the phase-out (Schedule 1-A line 13). |
| overtimeDeduction | Overtime deduction | Qualified overtime (the extra half) up to $12,500, or $25,000 jointly, less the phase-out (Schedule 1-A line 21). |
| qualifiedOvertime | Qualified overtime | The extra half of time-and-a-half pay: one third of all overtime pay, or the amount given. |
| federalSavings | Federal tax saved | The total deduction times the federal tax rate. |
| stateSavings | State tax saved | The total deduction times the state tax rate, when counted. |
| magi | Modified AGI | Other income plus all overtime pay plus tips, taken as the modified adjusted gross income. With “Only the extra half”, all overtime pay is three times it. |
| cut | Phase-out cut per deduction | $100 for every full $1,000 of MAGI over $150,000, or $300,000 jointly. |

## Method

Each deduction = its capped amount − $100 × ⌊(MAGI − threshold) ÷ $1,000⌋, not below 0. Tips are capped at $25,000; qualified overtime (the extra half of time-and-a-half pay) at $12,500 ($25,000 jointly); the threshold is $150,000 ($300,000 jointly). Tax saved = total deduction × tax rate.

## Assumptions

- Tax years 2025 to 2028 only; the limits are from IRS Schedule 1-A (Form 1040) 2025, the 2026 draft, and the IRS statement that they are the same through 2028.
- MAGI is taken as other income + all overtime pay + tips: no other adjustments and no excluded foreign or Puerto Rico income. With “Only the extra half”, all overtime pay is taken as three times the amount typed (time and a half).
- “All my overtime pay” means pay at time and a half, so one third of it is the extra half that qualifies. Pay above time and a half does not add to the qualifying part.
- All tips entered are qualified tips from an occupation on the IRS list; they must be reported, and you need a valid Social Security number.
- Married people must file jointly to claim; married filing separately gets no deduction.
- The saving is the deduction times your top tax rate, so it is an estimate: a deduction that crosses a bracket saves a little less. Social Security and Medicare taxes are not reduced.

## Worked examples

1. year = 2025, filingStatus = single, regularIncome = $50,000.00, overtimeIncome = $10,000.00, otPart = all, tipIncome = $5,000.00, federalTaxRate = 22%, includeStateTax = no gives qualifiedOvertime = $3,333.33, tipDeduction = $5,000.00, overtimeDeduction = $3,333.33, deduction = $8,333.33, federalSavings = $1,833.33, savings = $1,833.33, magi = $65,000.00, cut = $0.00. Source: IRS Schedule 1-A (Form 1040) 2025 Parts II and III.
2. year = 2025, filingStatus = single, regularIncome = $200,000.00, overtimeIncome = $12,500.00, otPart = all, tipIncome = $25,000.00, federalTaxRate = 22%, includeStateTax = no gives magi = $237,500.00, cut = $8,700.00, tipDeduction = $16,300.00, overtimeDeduction = $0.00, deduction = $16,300.00, savings = $3,586.00. Source: IRS Schedule 1-A (Form 1040) 2025 lines 7 to 13 and 15 to 21.
3. year = 2026, filingStatus = married, regularIncome = $300,000.00, overtimeIncome = $9,000.00, otPart = half, tipIncome = $20,000.00, federalTaxRate = 24%, includeStateTax = yes, stateTaxRate = 5% gives magi = $347,000.00, cut = $4,700.00, tipDeduction = $15,300.00, overtimeDeduction = $4,300.00, deduction = $19,600.00, federalSavings = $4,704.00, stateSavings = $980.00, savings = $5,684.00. Source: IRS Schedule 1-A (Form 1040) 2025 (same limits for 2026).
4. year = 2025, filingStatus = single, regularIncome = $150,500.00, overtimeIncome = $0.00, otPart = all, tipIncome = $10,000.00, federalTaxRate = 24%, includeStateTax = no gives magi = $160,500.00, cut = $1,000.00, tipDeduction = $9,000.00, savings = $2,160.00. Source: IRS Schedule 1-A (Form 1040) 2025 line 11: a part of $1,000 is dropped.

## FAQ

### What is the One Big Beautiful Bill tax deduction?

The One Big Beautiful Bill Act (Public Law 119-21) added two federal deductions for tax years 2025 to 2028: one for qualified tips, up to $25,000 a return, and one for qualified overtime pay, up to $12,500 ($25,000 for married couples filing jointly). You can take them whether or not you itemize.

### Who qualifies for these overtime and tip deductions?

Tips must be received in an occupation on the IRS list of occupations that customarily received tips. Overtime must be overtime pay required by the Fair Labor Standards Act. You need a valid Social Security number, and married people must file a joint return. The deductions phase out above $150,000 of modified adjusted gross income (MAGI), or $300,000 for joint filers.

### How does the phase-out work for these deductions?

Each deduction is reduced separately by $100 for every full $1,000 your MAGI is over the threshold ($150,000, or $300,000 for joint filers). A part of $1,000 does not count: $10,500 over cuts $1,000. For a single filer, the overtime deduction is gone at $275,000 of MAGI and the tips deduction at $400,000. For joint filers, both are gone at $550,000.

### What counts as qualified overtime compensation?

Only the extra pay above your regular rate that the Fair Labor Standards Act requires: the "half" in time and a half. If you earn $20 an hour and get $30 for an overtime hour, $10 of it qualifies. So one third of time-and-a-half overtime pay qualifies, up to $12,500 a year ($25,000 for joint filers).

### What counts as qualified tips?

Voluntary cash or card tips received in an occupation on the IRS list of tipped occupations, and reported to the IRS, up to $25,000 a return. Tips as a business owner count only up to the net profit of that business.

### How do I calculate my tax savings from these deductions?

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.

### Do these deductions apply to state 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.

### When do these deductions take effect?

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.

### How do I claim these deductions on my tax return?

Use Schedule 1-A (Form 1040), "Additional Deductions". Part II works out the tips deduction and Part III the overtime deduction. The total goes on Form 1040, line 13b. Your employer reports the qualified amounts on your Form W-2 or a separate statement.

### Are there any restrictions on claiming both deductions?

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.

### Do these deductions affect payroll taxes?

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.

### When do these tax breaks expire?

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

### How does the calculator determine my tax savings?

It follows Schedule 1-A: 1) MAGI = other income + all overtime pay + tips, 2) the tips deduction is your tips up to $25,000, and the overtime deduction is the qualifying half-time pay up to $12,500 ($25,000 jointly), 3) each is cut by $100 for every full $1,000 of MAGI over $150,000 ($300,000 jointly), 4) the total is multiplied by your tax rates.

### What are the official sources for this tax law?

The law is Public Law 119-21 (H.R. 1, 119th Congress), sections 70201 and 70202. The IRS explains it on IRS.gov and on Schedule 1-A (Form 1040). Always consult a tax professional for advice about your situation.

## Sources

- IRS, Schedule 1-A (Form 1040) 2025, Additional Deductions, Parts II and III (Cat. No. 95872Q, created 11/4/25). https://www.irs.gov/pub/irs-pdf/f1040s1a.pdf
- IRS, draft Schedule 1-A (Form 1040) 2026 (early release, created 6/16/26): same caps and phase-out. https://www.irs.gov/pub/irs-dft/f1040s1a--dft.pdf
- IRS, "Working Families Tax Cuts: Tax deductions for working Americans and seniors" (updated July 25, 2025): tax years 2025 to 2028, caps and thresholds. https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors
- IRS, "Questions and answers about the new deduction for qualified overtime compensation" (FS-2026-01, January 2026): only the pay above the regular rate required by FLSA section 7 qualifies. https://www.irs.gov/newsroom/questions-and-answers-about-the-new-deduction-for-qualified-overtime-compensation
- Public Law 119-21 (H.R. 1, 119th Congress), sections 70201 (qualified tips, IRC section 224) and 70202 (qualified overtime compensation, IRC section 225). https://www.congress.gov/bill/119th-congress/house-bill/1