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How OBBBA's "No Tax on Tips" and "No Tax on Overtime" Deductions Actually Work (Jul 2026)
The tips and overtime deductions are narrower than the headlines suggest. Caps, phaseouts, the occupation list, and a mechanical detail about AGI that REG and TCP candidates need to get right. Updated August 2026 with the revised IRS overtime FAQs.
Published July 15, 20268 min readVerified as of August 17, 2026
What the Deductions Are
OBBBA created two new deductions that run for tax years 2025 through 2028. Workers can deduct up to $25,000 of qualified tips and up to $12,500 of qualified overtime, or $25,000 of overtime for a married couple filing jointly. Both are claimed on the new Schedule 1-A attached to Form 1040. The name "no tax on tips" oversells it, since the deductions are capped, phased out at higher incomes, and limited to specific kinds of income. The IRS spelled out how individuals figure the 2025 deduction in Notice 2025-69.
No Tax on Tips: The Details
The tip deduction caps at $25,000 per year and phases out once modified adjusted gross income passes $150,000 for single filers or $300,000 for joint filers, dropping $100 for every $1,000 over the threshold. Only qualified tips count, meaning voluntary cash tips in an occupation that customarily and regularly received tips on or before December 31, 2024. Treasury published the list of qualifying occupations in final regulations on April 13, 2026, covering more than 70 occupations through a system of Treasury Tipped Occupation Codes. Service charges, mandatory auto-gratuities, and digital-asset tips do not qualify. Tips from a specified service trade or business under Section 199A, which includes accounting, generally do not qualify either, so an accountant who receives tips is largely outside this deduction.
No Tax on Overtime: The Details
The overtime deduction is narrower than most workers assume. It covers only the premium half of time-and-a-half pay, the portion above the regular rate that the Fair Labor Standards Act requires. Overtime paid under a state law or a union contract that goes beyond the federal FLSA requirement does not qualify. The cap is $12,500 for single filers and $25,000 for joint filers, with the same $150,000 and $300,000 phaseout thresholds as the tip deduction and the same $100-per-$1,000 reduction. Like the tip deduction, it is available to both itemizers and non-itemizers.
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The Mechanics That Trip People Up
Here is the detail examiners will test and the press keeps getting wrong. These are not above-the-line deductions and they do not reduce adjusted gross income. They were added to the Section 63(b) list of deductions used to compute taxable income, so the Schedule 1-A total flows to Form 1040 line 13b, which sits after AGI, alongside the standard deduction and the QBI deduction. That means tips and overtime deductions do not help with any tax item tied to AGI, such as credit phaseouts. They also do not change payroll taxes: tips and overtime remain fully subject to Social Security and Medicare tax and to income-tax withholding during the year.
Employer Reporting: 2025 Versus 2026
For 2025, employers get a break. The IRS made 2025 a transition year in Notice 2025-62, so no separate tip or overtime reporting is required on 2025 Forms W-2 or 1099, and employers get penalty relief for not breaking out those amounts. Full reporting begins in 2026. The 2026 General Instructions for Forms W-2 and W-3 add Box 12 code TP for total reported cash tips, Box 12 code TT for qualified overtime compensation, and Box 14b for the Treasury Tipped Occupation Code.
Update (August 2026): The IRS Rewrote the Overtime FAQs
On August 6, 2026 the IRS published a revised set of frequently asked questions on the qualified overtime deduction, superseding the version it issued in January 2026 and stripping out the material that applied only to tax year 2025. Three points are new. Starting with tax year 2026, an employee can claim the deduction only for qualified overtime compensation reported in Box 12 with code TT on Form W-2. If that amount is understated, the employee has to get a corrected Form W-2c from the employer, and Form 4852 cannot be used to claim additional deductible overtime. Employers must keep withholding federal income tax from overtime wages and may not reduce withholding because an employee expects to qualify for the deduction. The IRS developed the revisions with the Department of Labor and the Office of Personnel Management, and added guidance for federal employees. The caps and phaseouts are unchanged at $12,500 for single filers and $25,000 for joint filers, phasing out from $150,000 and $300,000 of modified adjusted gross income.
Exam Relevance
Both deductions are testable on REG and TCP starting July 1, 2026. The parts most likely to appear are the caps, the phaseout math, and the fact that these reduce taxable income but not AGI. For the other new OBBBA deductions, see our senior, car loan, and child care deductions guide, and for the full set of changes see our OBBBA overview.
Sources
- 1.IRS — Treasury, IRS Provide Guidance for Individuals Who Received Tips or Overtime During Tax Year 2025 (Notice 2025-69)(accessed Jul 15, 2026)
- 2.IRS — Questions and Answers About the New Deduction for Qualified Overtime Compensation(accessed Jul 15, 2026)
- 3.IRS — Treasury, IRS Issue Final Regulations Listing Occupations That Customarily and Regularly Receive Tips(accessed Jul 15, 2026)
- 4.IRS — Treasury, IRS Provide Penalty Relief for Tax Year 2025 for Information Reporting on Tips and Overtime (Notice 2025-62)(accessed Jul 15, 2026)
- 5.IRS — 2026 General Instructions for Forms W-2 and W-3(accessed Jul 15, 2026)
- 6.Journal of Accountancy — IRS Updates Overtime Deduction FAQs, Adds Reporting Details (Aug 10, 2026)(accessed Aug 17, 2026)
Brennan Kolar
Founder, Atlas CPA Index
Brennan Kolar is the founder of Atlas CPA Index, an independent CPA review comparison platform covering all 55 U.S. jurisdictions. With over 10 years of experience with CPA review, he built Atlas to help candidates find the right review course based on how they actually learn, not which provider has the biggest ad budget.
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