No one likes paying taxes, but they can feel especially painful if you're routinely working overtime and struggling to pay your bills, or if your income is heavily dependent on tips. President Donald Trump made a campaign promise to end federal taxes on these income sources to help working families out, and just a few months into his term, he's hoping to make good on that with a provision in the "One, Big, Beautiful Bill" that now sits in the Senate.
The House, which passed the bill by a single vote, initially hoped to have it on the president's desk by July 4. However, the Senate is determined to put its own stamp on it. That chamber has yet to release the final draft that it will vote on, but senators have already revealed some key changes, including limitations on the tax deductions for tips and overtime pay.
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How no taxes on tips and overtime would actually work
The House version of the bill created an above-the-line tax deduction for qualified tips -- those made voluntarily by customers in industries where employees typically receive tips -- and overtime pay at a rate that's higher than the rate employees typically receive for their work. This means you'd still report the money you earned from tips and overtime on your tax return, but you wouldn't owe federal income tax on it.
The House version of the bill had just two main restrictions on these tax deductions. The first was that you needed to have a work-eligible Social Security number to claim the deduction. The second was that highly compensated employees (HCEs) -- those who own 5% or more of the company they work for or who make more than $160,000 and are in the top 20% of their company by compensation -- wouldn't be eligible for the tax deductions.
There was no limit to the amount of money the deductions would cover, provided you met the requirements listed above. But the Senate's draft of the bill appears to be more restrictive.
Income caps for deductions
The Senate kept the work-eligible Social Security number requirement, but it did away with the HCE restriction, instead opting for two new sets of caps on the deductions.
The first limits the total tax deduction anyone may claim on qualified tips to $25,000 and the deduction on overtime pay to $12,500 ($25,000 for married couples filing jointly).
At those levels, if a substantial portion of your income comes from tips or overtime pay each year, it's likely that you'll still have to pay federal taxes on some of that income.
The other new restriction limits the deductions further for those with high modified adjusted gross incomes (MAGIs). In both cases, the IRS will reduce the maximum deduction available to you by $100 for every $1,000 your MAGI exceeds $150,000 for a single filer or $300,000 for a married couple filing jointly.
For qualified tips, that means you wouldn't qualify for the deduction at all if your MAGI was greater than:
- $400,000 for a single adult.
- $550,000 for a married couple filing jointly.
For overtime pay, you wouldn't qualify for the deduction if your MAGI exceeds:
- $275,000 for a single adult.
- $550,000 for a married couple filing jointly.
If your income falls somewhere in between the thresholds described above, you would qualify for reduced deductions.
This requirement is intended to do the same thing as the HCE restriction in the House bill, though it's a bit different. It could still allow some HCEs to claim the deduction. For example, a married couple where one spouse earns $250,000 a year and the other doesn't work could still claim the full deductions for tips and overtime pay. But couples where one spouse makes a high six-figure income and the other works as a waiter, for example, couldn't claim either the tip or overtime deduction under the Senate bill whereas the House version would've allowed the waiter to claim those deductions regardless of their spouse's earnings.
It's important to note that the "One, Big, Beautiful Bill" still has a long road through Congress, and further changes will be coming. There's a lot more to the bill than just tax deductions for tips and overtime pay, so it could be a while before all the differences between what Senate and House leaders want to see in it are hammered out in the compromise process Washington dubs "reconciliation." If it does become law, the tip and overtime deductions would only apply to the 2025 to 2028 tax years, according to the latest draft of the bill. After that, Congress would have to vote on a new bill to extend them.
