One of the components of the recently passed "big, beautiful bill" was the implementation of a policy not to tax overtime and tips for many Americans.
President Donald Trump campaigned on a promise of eliminating taxes on tips during the 2024 election, and with a stroke of his pen, that policy has now been enacted, albeit temporarily.
Here’s how everything works, and how the policy is limited in scope.
With Trump’s signing of the bill last week, the changes go into effect for tax year 2025, meaning that when workers are filing taxes next spring, they will be able to deduct their tip and overtime incomes on their forms.
According to the text of the bill, both the deductions for overtime and tips will be considered “above-the-line,” meaning that they will be subtracted from a taxpayer’s gross income during the calculation of their adjusted gross income for the tax year. Those types of deductions are typically intended to reduce a taxpayer’s tax liability, according to the IRS.
Other types of “above-the-line” deductions include traditional IRA contributions, student loan interest, health savings accounts, alimony payments and a variety of other expenses.
According to the text of the bill, the limit on the deduction for tips is capped at $25,000 per year.
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