OBBA and New Deductions for Tips & Overtime: What Workers Need to Know
- Maria Alvarez
- Oct 4
- 2 min read
The One Big Beautiful Act (OBBA) includes a wide range of tax changes, but one of the most worker-focused updates is the introduction of new deductions for tips and overtime pay. For employees who regularly rely on these forms of income, this provision could mean real tax savings.
What Changed Under OBBA?
Starting in 2025 and running through 2028, OBBA introduces special deductions that apply directly to income earned from tips and overtime:
Up to $25,000 in tips can be deducted.
Up to $12,500 in overtime pay can be deducted (or $25,000 for married couples filing jointly).
These deductions phase out for higher-income earners, meaning the full benefit applies mainly to middle- and lower-income workers.
Why This Matters
For millions of service workers, restaurant staff, and hourly employees, tips and overtime make up a big part of take-home pay. Historically, all of this income has been fully taxable. OBBA changes that by carving out space for tax-free earnings.
This shift:
Puts more money back in workers’ pockets by lowering taxable income.
Recognizes the unique challenges of workers who depend on variable income sources.
Helps families stretch their budgets further during a time of rising living costs.
Example
Let’s say you earn $20,000 in tips and $8,000 in overtime in 2026.
With OBBA’s deduction, you can write off all $20,000 in tips and $8,000 in overtime (since both amounts fall under the limits).
That’s a total deduction of $28,000.
The result? A much lower taxable income — and potentially thousands saved in taxes.
Planning Ahead
If you’re in a job where tips or overtime make up a significant share of your pay:
Track your income carefully starting in 2025. Documentation will be key.
Talk with a tax advisor about how these deductions interact with other credits, like the Earned Income Tax Credit (EITC) or Child Tax Credit.
Remember the timeline: These deductions only apply from 2025 through 2028 — unless extended by future legislation.
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