Across the communities we serve, many people rely on tips or overtime to make their household budgets work. Restaurant servers, bartenders, health care professionals and others often see their income change week to week.
Beginning with income earned in 2025, new federal tax rules could help some of these workers keep more of their money at tax time. Here’s what to know.
What Changed
A new federal law created temporary federal income tax deductions for certain tip income and overtime pay for tax years 2025 through 2028. These changes apply to federal income taxes only. All income must still be reported, and Social Security and Medicare taxes still apply.
Tip income: Eligible workers in traditionally tipped jobs may be able to deduct up to $25,000 in qualified tips each year, depending on income.
Overtime pay: Eligible workers may be able to deduct up to $12,500 in qualified overtime pay per year or up to $25,000 for married couples filing jointly.
A Couple of Quick Examples
James is a restaurant server. In 2025, James reports $18,000 in tips. Because that amount is below the $25,000 limit and assuming he meets income requirements, he may be able to deduct the full amount from his federal taxable income. That could lower his tax bill or increase his refund.
Lisa works in health care and over the course of the year earns $6,000 in overtime pay. Under the new rules, she may be able to deduct the overtime premium portion, the extra pay above her normal hourly rate, not the full amount. Her exact benefit depends on how her overtime is calculated.
What This Does and Does Not Mean
A few important reminders:
Tips and overtime must still be reported to employers and on tax returns.
These changes do not make income tax free. Payroll taxes and state taxes may still apply.
The deductions are claimed when you file your tax return and do not change your paycheck during the year.
Not everyone will qualify. Income limits and job type matter.
Why It Matters
For workers whose income includes tips or overtime, even a modest reduction in federal taxable income can make a difference. Extra money at tax time may help cover everyday expenses, build savings or pay down debt.