IRS Issues Guidance on Claiming Tax Deductions for Tips and Overtime: What You Need to Know

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The US Department of the Treasury and the Internal Revenue Service (IRS) have issued new guidance for workers who can claim tax deductions on tips and overtime compensation for the 2025 tax year under the One Big Beautiful Bill Act (OBBBA). According to the guidance, 'qualified tips' include voluntary cash or card tips, not forced service charges, even if they were not separately reported by the employer. Workers in traditionally tipped occupations can deduct up to $25,000 of 'qualified tips' for the tax year 2025. However, the deduction phases out for individuals with modified adjusted gross income (MAGI) above $150,000 (or $300,000 for joint filers). The IRS has clarified how to compute this deduction even if Form W-2 or 1099 does not separately list tips. Workers may rely on Social Security tips reported in Box 7 of W-2 or tips reported to an employer. Self-employed workers can rely on contemporaneous tip logs. For 'qualified overtime compensation,' the IRS defines it as the portion of overtime that exceeds the regular rate of pay, generally the 'half-time premium.' For 2025, the maximum overtime deduction is $12,500 (or $25,000 for joint filers). This deduction is available to both non-itemizers and itemizers. However, only overtime mandated under the U.S. Fair Labor Standards Act (FLSA) counts. Pay in excess of the legally required overtime rates does not qualify. The IRS is allowing 'reasonable methods' to calculate qualified tip or overtime amounts, as W-2 and 1099 forms have not been updated for 2025 to reflect the new deductions. Employers are encouraged, though not required, to voluntarily furnish more detailed statements to help employees claim the deductions. The IRS is updating its tax forms and instructions for the upcoming tax-filing season, including a new Schedule 1-A (Additional Deductions) for these and other OBBBA-related deductions.