What to know -- and what isn't known yet -- about US tax deductions for tips and overtime pay
But which workers will qualify for the new deductions is among the details the government has to work out after President Donald Trump's signature spending and policy package won final congressional approval.
Under the bill Trump signed into law on July 4, the U.S. Treasury Department must publish a list by Oct. 2 of occupations that qualify for tax-free tips. The department is also expected to publish guidance on how to report tips and overtime pay, and what documentation will be required.
The deduction provisions are not permanent but were written to expire after the 2028 tax year.
Overtime pay isn't currently separated out on an employee's W-2 tax form, for example, but employers generally keep track of it and itemize it on employees' pay stubs, said Miguel Burgos, a certified public accountant with TurboTax.
Employers should continue to withhold taxes while waiting for guidance, Burgos said. The bill doesn't apply to state and local taxes or to federal payroll taxes, which help fund Social Security and Medicare.
Here's what we know about tax-free tips and overtime:
Who is expected to qualify for tax-free tips?
The bill says eligible workers are those who already regularly received tips before December 2024. In the restaurant industry alone, there are 2.1 million tipped servers and bartenders, according to the National Restaurant Association.
Barbers, hairdressers, nail technicians and delivery drivers are also expected to be included. Workers must include a Social Security number when they file their taxes to be eligible, and a spouse's Social Security number if they're married and filing jointly.
How much will eligible workers be able to deduct?
Workers will be able to deduct up to $25,000 in tips if they make less than $150,000 (or $300,000 if they're married and filing jointly). The amount workers can deduct is reduced by $100 for every $1,000 they make over $150,000.
Who will see the most benefit from not paying federal taxes on tips?
The change will not affect around 40% of tipped workers since they already pay little to no income tax, according to the nonpartisan Tax Policy Center. The other 60% of tipped workers are expected to see an average tax cut of $1,800 per year.
What kinds of tips will be counted?
Both cash tips and credit cards are included. Tips pooled together and then distributed to a restaurant's employees are also included, although servers may be less inclined to participate in tip pooling now that they are eligible for a tax deduction. Service charges – such as an automatic gratuity for a large party – aren't included because the bill makes clear that eligible tips must be 'paid voluntarily.'
Who will be eligible for tax-free overtime?
The Budget Lab at Yale estimates that 8% of U.S. hourly workers and 4% of salaried workers are regularly paid overtime under the Fair Labor Standards Act, which requires overtime pay of at least time and a half once employees have worked 40 hours in a week. People working in many jobs, including clergy, teachers and executives, are exempt from federal overtime rules.
How much in overtime can workers deduct from their federal taxes?
Workers can deduct up to $12,500 in overtime (or up to $25,000 in a joint return). Like the tip measure, the amount workers can deduct is reduced if they make more than $150,000. And they must include a Social Security number when they file.
How much of a tax cut is an overtime deduction likely to yield?
The average worker is expected to see a tax cut of between $1,400 and $1,750 per year, according to the White House Council of Economic Advisers.
According to an analysis by the nonpartisan Joint Committee on Taxation, tax-free tips would reduce federal revenue by $31 billion between the 2026 and 2029 fiscal years, while tax-free overtime would reduce federal revenue by $90 billion during the same period.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Reuters
5 minutes ago
- Reuters
US defense bill proposes examination of Apple display supplier
SAN FRANCISCO, Aug 1 (Reuters) - A measure added into a massive U.S. defense spending bill in recent weeks will, if passed, ask the Pentagon to determine whether one of Apple's (AAPL.O), opens new tab display suppliers should be listed as a Chinese military company. Being on the list does not block companies from doing business in the U.S. but will in coming years block them from being part of the U.S. military's supply chain. The bill, known as the National Defense Authorization Act, was approved in July by key committees in both houses of the U.S. Congress. The final bill, considered a "must-pass" because it funds the U.S. military, is expected to become law later in the year. When the bill was approved by the U.S. House of Representatives Armed Services Committee, a newly added amendment for the first time asked the U.S. Defense Department to consider, opens new tab whether BOE Technology Group Co , listed on Apple's official suppliers list, should be added to a list of firms that allegedly aid China's military. BOE and Apple did not respond to requests for comment. Craig Singleton, a China expert at the Foundation for Defense of Democracies, a Washington think-tank, said Beijing had offered billions of dollars in subsidies, tax breaks and loans to help firms such as BOE dominate global panel production. "This creates a single‑source vulnerability that could be easily exploited to disrupt or degrade U.S. military operations, not to mention undermine commercial supply chains, during a conflict or period of heightened bilateral tension with Beijing," Singleton added. A study published last month by New York-based NERA Economic Consulting and commissioned by BOE's U.S. subsidiary found that the display industry, which includes major Korean players such as Samsung Electronics and LG Electronics, remains highly competitive, with no single player capable of significantly affecting global prices. "There is no credible risk of a supply chain disruption by mainland China display manufacturers," the report said.
The Independent
6 minutes ago
- The Independent
Democrats find it hard to move on when Biden and Harris keep hogging the spotlight
Donald Trump is President of the United States. Republicans control all three branches of government. And even as Democrats are planning to regroup and contest next year's midterm elections, the two people who many of them blame for last year's dismal election outcome simply will not go away. More than half a year after they left office after a single four-year term, former president Joe Biden and former vice president Kamala Harris are continuing to remain in the spotlight and allow Republicans to highlight their failures instead of letting their party move on and find a way to regain the support that was lost during their time in office. Harris, who lost all seven of the contested swing states in last year's election, recently announced an upcoming book that will focus on the 107-day campaign she waged against Trump after Biden withdrew from the 2024 race following his dismal debate performance last June. She also revealed that she won't enter the upcoming race to succeed California Governor Gavin Newsom, who must leave office in 2027 when his second four-year term ends, leaving open the possibility that she'll enter what is expected to be a crowded primary race for the 2028 Democratic presidential nomination. Biden, whose 11th hour pardons of his family members and other political allies emboldened Trump to grant reprieves for the violent rioters who tried to prevent his 2020 loss from being certified, is still giving speeches in which he is attacking his predecessor-turned-successor, a stark contrast from how most former presidents have behaved after leaving office. At one such appearance, an address to the National Bar Association in Chicago on Thursday, he accused the Trump administration of 'doing its best to dismantle the Constitution,' giving right-wing media outlets plenty of fodder to use at a time when his party is trying to focus on the future and the current government's policy problems. And the president's son, Hunter Biden, is doing his best to stay in the headlines with a series of podcast appearances in which he casts blame for his father's exit from the race on a broad range of people — but not his father. The former Democratic ticket's refusal to fade away after a devastating electoral performance is ruffling feathers among party figures who are tasked with moving forward and figuring out how to escape from the wilderness in next year's midterms. A number of popular governors, including Illinois' JB Prizker and Kentucky's Andy Beshear, have been making the trek to early primary states with an eye towards 2028, and voters are increasingly eager to elect new faces rather than older establishment figures. Donna Bojarsky, a Democratic consultant, told The Washington Post that 'nobody' in the party is looking to go 'back to 2024' as they look for a way forward against the Republicans. 'The shadow of 2024 is long, and I think all perspectives in the mix believe we need something fresh,' she said. Another strategist Cooper Teboe, said the party's current predicament stems from a sclerosis that has taken hold on account of incumbents refusing to relinquish power to the next generation. 'The core reason the Democratic Party is in the position it is in today is because no new figures, no new ideas, have been allowed to rise up and take hold,' he said. But there is a group eager for Biden and Harris to remain part of the national conversation — Republicans. One GOP consultant who spoke to The Independent said Hunter Biden's recent profanity-laced podcast appearances and the former president's speeches are just what they need to keep his failures in the public eye as his party tries to regain the trust of voters. 'Hunter Biden is just what Democrats need more of going into the midterms,' he said, more than a bit sarcastically.
The Independent
6 minutes ago
- The Independent
Trump administration freezes $339M in UCLA grants and accuses the school of rights violations
The Trump administration is freezing $339 million in research grants to the University of California, Los Angeles, accusing the school of civil rights violations related to antisemitism, affirmative action and women's sports, according to a person familiar with the matter. The federal government has frozen or paused federal funding over similar allegations against private colleges but this is one of the rare cases it has targeted a public university. Several federal agencies notified UCLA this week that they were suspending grants over civil rights concerns, including $240 million from the Department of Health and Human Services and the National Institutes of Health, according to the person, who spoke about internal deliberations on the condition of anonymity. The Trump administration recently announced the U.S. Department of Justice's Civil Rights Division found UCLA violated the Equal Protection Clause of the Fourteenth Amendment and Title VI of the Civil Rights Act of 1964, 'by acting with deliberate indifference in creating a hostile educational environment for Jewish and Israeli students.' Last week, Columbia agreed to pay $200 million as part of a settlement to resolve investigations into the government's allegations that the school violated federal antidiscrimination laws. The agreement also restores more than $400 million in research grants. The Trump administration plans to use its deal with Columbia as a template for other universities, with financial penalties that are now seen as an expectation. The National Science Foundation said in a statement it informed UCLA that it was suspending funding awards because the school isn't in line with the agency's priorities. UCLA's chancellor Julio Frenk called the government's decision 'deeply disappointing.' 'With this decision, hundreds of grants may be lost, adversely affecting the lives and life-changing work of UCLA researchers, faculty and staff," he said in a statement. The Department of Energy said in its letter it found several 'examples of noncompliance' and faulted UCLA for inviting applicants to disclose their race in personal statements and for considering factors including family income and ZIP code. Affirmative action in college admissions was outlawed in California in 1996 and struck down by the Supreme Court in 2023. The letter said the school has taken steps that amount to 'a transparent attempt to engage in race-based admissions in all but name,' disadvantaging white, Jewish and Asian American applicants. It also said UCLA fails to promote an environment free from antisemitism and discriminates against women by allowing transgender women to compete on women's teams. Frenk said that in its letter the federal government "claims antisemitism and bias as the reasons' to freeze the funding but 'this far-reaching penalty of defunding life-saving research does nothing to address any alleged discrimination.' Earlier this week, UCLA reached a $6 million settlement with three Jewish students and a Jewish professor who sued the university arguing it violated their civil rights by allowing pro-Palestinian protesters in 2024 to block their access to classes and other areas on campus. UCLA initially had argued that it had no legal responsibility over the issue because protesters, not the university, blocked Jewish students' access to some areas. The university also worked with law enforcement to thwart attempts to set up new protest camps. The university has said that it's committed to campus safety and inclusivity and will continue to implement recommendations. ___ Rodriguez reported from San Francisco and Binkley from Washington.
