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IRS Clarifies ‘No Tax on Tips’ and ‘No Tax on Overtime’ for 2025 Returns

Written by: Kusum KumariUpdated on: 19 Jan 2026, 7:57 pm IST
IRS allows deductions on tips (up to $25,000) and overtime (up to $12,500) for 2025–2028 under the new law. Filing season opens Jan 26, 2026.
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The US Treasury Department and the IRS have released fresh rules to help workers claim new deductions on tips and overtime pay starting from tax year 2025.

Filing Season Dates

The 2026 tax filing season will officially begin on January 26, 2026. Taxpayers must file their 2025 tax returns and pay any taxes due by April 15, 2026.

The IRS Free File system is already open for eligible taxpayers from January 9, while fillable forms for all income levels will be available from January 26.

No Tax on Tips

Under the new “One, Big, Beautiful Bill,” workers who earn tips can claim a deduction of up to $25,000 per year between 2025 and 2028.

This benefit starts reducing once a taxpayer’s income crosses $150,000 (or $300,000 for couples filing jointly). Around 6 million tipped workers are expected to benefit.

No Separate Reporting Needed

Employers will not issue new forms for tips or overtime. Workers can calculate their eligible deduction using existing W-2 or 1099 income details, as explained by the IRS.

No Tax on Overtime

Workers receiving overtime pay required under US labor law can deduct the extra portion earned above their regular pay rate from 2025 to 2028.

The yearly deduction limit is $12,500 ($25,000 for joint filers) and begins to phase out above the same $150,000/$300,000 income levels. Both itemizers and non-itemizers can claim it.

Read More: PPF Calculator: How to Build a Tax-Free ₹41 Lakh Corpus with Just ₹12,500 Monthly.

New Form for Claims

Taxpayers will use the newly introduced Schedule 1-A to claim deductions such as tax-free tips, overtime, car loan interest relief and higher deductions for seniors.

Conclusion

The IRS has made it easier for workers to reduce taxable income on tips and overtime from 2025 onward. Eligible taxpayers should review the new rules carefully to maximise benefits.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.

Published on: Jan 19, 2026, 2:27 PM IST

Kusum Kumari

Kusum Kumari is a Content Writer with 4 years of experience in simplifying financial market concepts. Currently crafting insightful content at Angel One, She specialise in breaking down complex topics into easy-to-understand pieces, blending expertise in market fundamentals and technical analysis.

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