IRS clarifies new deductions for tips and overtime starting in 2025
The Department of the Treasury and the Internal Revenue Service recently issued guidance explaining how workers may claim new deductions for qualified tips and qualified overtime compensation beginning with the 2025 tax year.
Deduction for qualified tips
Workers who receive qualified tips may be eligible for a deduction of up to $25,000 per year. The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
The IRS clarified that workers do not need a separate accounting from their employer to claim the deduction. Taxpayers may rely on existing reporting and their own records, including tips reported on Form W-2, additional tips reported by the worker, or personal logs maintained by self-employed individuals.
Deduction for qualified overtime compensation
For tax years 2025 through 2028, eligible workers may also deduct the overtime premium portion of their pay—generally the amount paid above the regular rate of pay required by the Fair Labor Standards Act.
The maximum annual deduction is $12,500 ($25,000 for joint filers), with the same income phase-out thresholds that apply to the tips deduction. The deduction is available to both itemizing and non-itemizing taxpayers.
Why this guidance matters
While these deductions may be valuable, the rules are technical and depend heavily on income levels, how pay is reported, and the taxpayer’s ability to substantiate amounts. The IRS has indicated that tax forms and instructions will continue to be updated to assist taxpayers during this transition period.
Source
This article is based on IRS guidance released November 21, 2025:
Treasury, IRS provide guidance for individuals who received tips or overtime during tax year 2025
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