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Big Win for Workers: No Federal Tax on Tips or Overtime Starting This Year

  • nimetconsulting
  • Jul 5
  • 3 min read
No Federal Tax on Tips or Overtime Starting This Year


In a landmark move for working Americans, the “Freedom to Earn Act” was officially signed into law yesterday - and it’s bringing real, immediate financial relief to millions.

If you work overtime, earn tips, or both, here's the headline: you won’t owe any federal income tax on that money starting January 1, 2025.

That’s right - the extra hours you put in and the tips you hustle for are finally being treated with the respect they deserve.


What the Law Actually Does

This is not just political fluff. The law introduces real, tangible benefits that kick in this year and run through 2028:


 No Federal Tax on Tips

  • Effective now: All tips earned from January 1, 2025 to December 31, 2028 are federally tax-free.

  • Limit: Up to $25,000 per year in tips can be deducted from your taxable income.

  • Income cap: If you earn more than $150,000 (or $300,000 as a couple), the benefit starts to phase out.

 No Federal Tax on Overtime Pay

  • Also starting January 1, 2025, overtime pay is fully tax-deductible up to:

    • $12,500 per year for individuals

    • $25,000 per year for joint filers

  • Applies only to the premium portion - the extra 50% you earn beyond 40 hours/week (as defined by the Fair Labor Standards Act).

  • Like with tips, this phases out if your income crosses $150,000/$300,000.

 Above-the-Line Deductions

  • These deductions lower your adjusted gross income (AGI) - which could mean even bigger savings on other credits like the Child Tax Credit or student loan interest deduction.

  • Best part? You don’t need to itemize - anyone can claim this.


📆 When Does It Start?

This isn’t one of those “someday” policies. The new tax rules are already in effect:

Income Earned

Tax Return Affected

January 1 – Dec 31, 2025

File by April 15, 2026

2026, 2027, 2028

File by standard deadlines for those years

So when you file your taxes next April (2026), you can deduct your 2025 overtime and tips - and likely see a much larger refund.


🧾 How It’ll Work

For now, the IRS is still ironing out the fine print, but here’s what we know:

  • Employers must report your tips and overtime separately on your W-2, starting with the 2025 tax year.

  • In 2025, employers can use estimated totals, but beginning in 2026, more precise tracking will be required.

  • You’ll claim the deduction yourself on your tax return. It’s expected to be a simple line item under "adjustments to income."

If you’re self-employed, you'll still qualify - you'll just calculate and deduct tips and overtime separately when you file.


💰 Real Money in Your Pocket

Let’s say you’re a restaurant server earning $18,000 a year in tips. Previously, you’d owe federal taxes on that income - which could be around $2,000 to $3,000 depending on your bracket.


Now? That money is yours to keep.

Or maybe you work in construction and regularly put in 10 hours of overtime a week. That could add up to an extra $10,000 in time-and-a-half wages annually. Previously, you’d lose $1,200–$2,000 of that to taxes. This year, you don’t.


⚠️ A Few Caveats

  • State taxes may still apply. This is a federal tax law - your state may or may not follow suit.

  • Income caps exist. If your MAGI (Modified Adjusted Gross Income) is above $150,000 as a single filer (or $300,000 jointly), the deduction will start to shrink.

  • Employer compliance is key. Make sure your overtime and tip income is reported correctly on your W-2.


Bottom Line: Work More, Keep More

This bill delivers a clear message: if you’re working extra, you deserve to keep every extra dollar. Whether you're a server, driver, nurse, mechanic, or anyone clocking overtime — the Freedom to Earn Act puts more cash directly into your hands.

No gimmicks. No loopholes. Just more money where it belongs - with you.

 
 
 

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