As the new year begins, millions of Americans will soon see some welcome relief when they file their taxes. The IRS has released new guidance explaining how workers can claim two new tax benefits — “no tax on tips” and “no tax on overtime” —for the 2025 tax year.
The changes are covered under One Big Beautiful Bill Act, a newly signed tax and spending law by President Donald Trump. The bill passed Congress along party lines and made these two deductions a key part of Trump’s economic agenda.
With tax season just weeks away, the Treasury Department and the IRS are now laying out how eligible workers can make use of these new rules. Here’s everything to know.
IRS: How workers can claim these deductions
For the 2025 tax year, Form W-2 and Form 1099 will not separately list income earned from tips or overtime. As a result, workers who qualify may need to calculate these amounts on their own.
To help, the IRS has included examples in its guidance showing how both deductions work, depending on whether the income was reported or unreported. The agency has also said it is updating tax forms and instructions to make claiming these benefits easier during filing season.
While the exact start date for filing 2025 taxes hasn’t been announced yet, it usually begins in late January.
What the ‘No Tax on Tips’ rule means
Under the new law, workers who earn qualified tips can deduct up to $25,000 a year from their taxable income. However, the benefit starts to narrow for higher earners. The deduction phases out for individuals with a modified adjusted gross income above $150,000, or $300,000 for joint filers.
According to the IRS estimate, about 6 million people in the US earn tips as part of their job. For these workers, the new tax rule will last for four years, from 2025 to 2028. During this time, they can reduce the amount of income they pay tax on because their tip earnings are treated more kindly. In short, it means less tax to pay and more money staying in their pocket over the next few years.
How ‘No Tax on Overtime’ works
The overtime deduction applies to the extra pay workers earn beyond their regular hourly rate. In simple terms, it covers the additional portion of “time and a half” pay, usually the extra half of the wage, that shows up on a W-2, 1099, or similar income statement.
Workers can deduct up to $12,500 a year, or $25,000 for joint filers. Just like the tips deduction, this benefit phases out for taxpayers earning more than $150,000, or $300,000 for couples filing together.
One key point is that this deduction is available whether or not a taxpayer itemises deductions, making it accessible to more people.
Who qualifies for overtime pay
Under the Fair Labor Standards Act, most employees must be paid at least the federal minimum wage for all hours worked, along with overtime pay, typically one-and-a-half times their regular rate, for hours worked beyond 40 in a week.
That said, some workers are exempt from overtime rules. This includes certain salaried employees earning at least $1,128 per week, or $58,656 per year, as well as workers in specific job categories.
The IRS says it is continuing to update tax forms and instructions ahead of filing season to help workers correctly claim these deductions. While filing officially hasn’t opened yet, the guidance gives taxpayers an early look at how these new benefits will work in practice.