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As tax season approaches, the IRS has released guidance for workers who can claim federal deductions for tips and overtime pay enacted by President Donald Trump’s “Big and Beautiful Bill.”
Guidance released last week explains how to report these deductions on your tax return. But experts say workers could still face questions when it comes time to pay their taxes.
The tip provision allows certain workers to deduct up to $25,000 in “qualified tips” from 2025 to 2028. The tax break phases out once your modified adjusted gross income exceeds $150,000 ($300,000 for married couples filing jointly).
Meanwhile, President Trump’s tax cut on eligible overtime pay provides a deduction of up to $12,500 for single filers and up to $25,000 for joint filers, with the same income phaseout. This provision is also temporary and will take effect from 2025 to 2028.
By law, workers can deduct tips and overtime pay when their income is reported on so-called information returns, such as Forms W-2 and 1099s.
The IRS “strongly encourages” employers to file this report, but it is not required for the 2025 tax year, said Thomas Gorczynski, an enrolled agent based in Tempe, Arizona. This is a tax license submitted to the IRS.
“We’re going to have another year of hodgepodge and strange rules that will make reporting very difficult for employees,” said Gorchinski, who also educates tax professionals about the changes in the law.
About 6 million workers report tipped wages, according to IRS estimates. Nationally, about 6% of workers will be paid overtime in 2024, according to the Peter G. Peterson Foundation, a business organization.
These taxpayers will soon have to deal with President Trump’s 2025 tip and overtime deductions that will apply to returns filed in 2026.
“Taxpayer confusion regarding these provisions will be an unexpected surprise at tax time,” Terry Lemons, former communications and liaison officer for the IRS, said in a LinkedIn post last week.
“Transitional relief” for some tipped workers
The new IRS guidance also includes “transition relief” for certain workers who receive tips through so-called “specified service trades or businesses” (SSTBs).
President Trump’s 2017 tax law outlines a list of SSTBs that limit eligibility for the 20% deduction for certain businesses, including sectors such as health care, law, financial services and the performing arts.
SSTB workers are excluded from claiming new tip deductions under President Trump’s “Big and Beautiful Bill.” However, these workers may be temporarily eligible for the tip deduction until the Treasury Department and IRS finalize regulations.
“We don’t want people to think that this new exemption is a permanent provision or a permanent guideline,” Gorczynski said.
He said this is a “temporary exemption” for some SSTB workers from claiming the tip deduction in 2025. However, if they lose their eligibility, there could be an “unfortunate surprise” after 2026.
