Can You Claim a Tax Deduction for Tips or Overtime Income?

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If you received tips or overtime pay in 2025, you may be eligible for a new deduction when you file your income tax return. Both deductions can be claimed whether or not you itemize deductions. But various rules and limits apply. Also be aware that such income may still be fully taxable for state and local income tax purposes. And federal payroll taxes still apply to tips and overtime income you deduct for federal income tax purposes.


Deducting Tips

Eligible taxpayers can deduct up to $25,000 of annual qualified tips income. The deduction begins to phase out when modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for married couples filing jointly). It’s completely phased out when MAGI reaches $400,000 ($550,000 for joint filers).


Qualified tips can be paid by customers in cash or with credit cards or given to workers through tip-sharing arrangements. The tips deduction is available if you receive qualified tips in an occupation that’s designated by the IRS as one where tips are customary. Some examples of eligible occupation categories are beverage and food service, hospitality and guest services, personal appearance and wellness, and transportation and delivery.


The tips deduction is allowed for both employees and self-employed individuals. However, those who work in certain trades or businesses (such as health, law, accounting, financial services, investment management) are ineligible.


Deducting Overtime

Eligible taxpayers can deduct up to $12,500 of qualified overtime income ($25,000 for joint filers). The deduction begins to phase out when MAGI exceeds $150,000 ($300,000 for joint filers). It’s completely phased out when MAGI reaches $275,000 ($550,000 for joint filers).

Qualified overtime income is overtime compensation mandated under Section 7 of the Fair Labor Standards Act. It requires time-and-a-half overtime pay except for certain exempt workers. Only the extra “half” constitutes qualified overtime income and thus is deductible.

Qualified overtime income doesn’t include overtime premiums that aren’t required by Sec. 7, such as those required under state laws or pursuant to union-negotiated collective bargaining agreements.


Reporting Requirements

Under the OBBBA, qualified tips income must be reported on Form W-2, Form 1099-NEC or another specified information return or statement furnished to both the worker and the IRS. And qualified overtime income must be reported to workers on Form W-2 or another specified information return or statement furnished to both the worker and the IRS.

However, the IRS announced that for the 2025 tax year, there will be no OBBBA-related changes to federal information returns such as Form W-2, Forms 1099 and Form 941. The IRS is providing transition relief for the 2025 tax year and will update forms for the 2026 tax year.

Contact the office for help determining your eligibility for one or both of these deductions.

January 2026 Newsletter

By Sarah Bolton • January 7, 2026
Our regularly updated newsletter provides timely articles to help you achieve your financial goals. Please come back and visit often. Feature Articles Can You Claim a Tax Deduction for Tips or Overtime Income? Businesses: Act Soon to Take Advantage of Clean Energy Tax Incentives Make Smart Choices With a Sudden Windfall Tax Tips 2026 Tax Law Changes for Individuals Heavy Tax Breaks for Heavy Business Vehicles More Taxpayers May Qualify for the Casualty Loss Deduction

January 2026: Upcoming Tax Due Dates

By Sarah Bolton • January 7, 2026
January 15 Employers: Deposit nonpayroll withheld income tax for December 2025 if the monthly deposit rule applies. Individuals: Pay the fourth installment of 2025 estimated taxes (Form 1040-ES) if not paying income tax through withholding or not paying sufficient income tax through withholding. February 2 Employers: File 2025 Form W-2 (Copy A) and transmittal Form W-3 with the Social Security Administration. Employers: File a 2025 return for federal unemployment taxes (Form 940) and pay any tax due if all the associated taxes weren’t deposited on time and in full. Employers: Report Social Security and Medicare taxes and income tax withholding for the fourth quarter of 2025 (Form 941) if all of the associated taxes due weren’t deposited on time and in full. Employers: Provide 2025 Form W-2 to employees. Businesses: Provide 2025 Form 1098, Form 1099-MISC (except for those with a February 18 deadline), Form 1099-NEC and Form W-2G to recipients. Individuals: File a 2025 income tax return (Form 1040 or Form 1040-SR) and pay the tax to avoid penalties for underpaying the January 15 installment of estimated taxes. February 10 Employers: File a 2025 return for federal unemployment taxes (Form 940) if all associated taxes due were deposited on time and in full. Employers: Report Social Security and Medicare taxes and income tax withholding for the fourth quarter of 2025 (Form 941) if all associated taxes due were deposited on time and in full. Individuals: Report January tip income of $20 or more to employers (Form 4070). 

More Taxpayers May Qualify for the Casualty Loss Deduction

By Sarah Bolton • January 7, 2026
Starting in 2026, personal casualty loss deductions will no longer be limited to federally declared disasters. Certain state-declared disasters will also be eligible. For a disaster to qualify, the governor (or D.C. mayor) and the U.S. Treasury Secretary must agree that the damage is severe enough to apply these rules. Now more taxpayers affected by natural disasters or by fires, floods or explosions, regardless of the cause, may qualify.  Note that taxpayers can still claim personal casualty losses not attributable to federally or state-declared disasters, but only to the extent of any personal casualty gains. Need guidance? Contact the office for help.