About That "No Tax on Tips or Overtime" Thing...
So you've probably heard about the new law saying there's "no tax" on tips and overtime. Here's the thing: it's not exactly what it sounds like.
You're still paying taxes on your tips and overtime. What changed is you are now allowed a deduction that lowers your taxable income based on a portion of each.
There are two other provisions in the 2025 -2028 tax years that you might benefit from, the car loan interest and senior (aged 65+) deductions. All will be outlined below.
The Tips Part
The basics:
If you work a job where you normally get tips such as a server, bartender, hairstylist, delivery driver, etc. (as defined by a Treasury tipped occupation code or “TTOC”), you can deduct up to $25,000 of those reported tips when you file your taxes! This is available regardless if you itemize or take the standard deduction.
The catch:
- The maximum deduction of $25,000 is per return, not per taxpayer. If you file with a spouse, your combined deduction is maxed out at $25,000.
- Only reported tips count— I’ve bolded this again because if you didn’t report them, you can’t deduct them. The tips can be reported by your employer on a W-2 (mixed with your other wages), to you on a 1099, voluntarily yourself with IRS form 4137, or other documentation if it's included in your business income.
- Qualified tips do not include automatic service charges your employer adds to its customer checks. This could be gratuity or charges for large parties, even if you get some of it. The tip must have been voluntary and at the discretion of the tipper.The tips can be in cash, charged or through tip sharing.
- This was implemented mid year so likely your 2025 W-2 itself won’t have your tips identified separately from your other wages, you will need a secondary source to find that information like a final paystub.
- If you are married you must file a joint return to claim the deduction.
- If you make over $150,000 single or $300,0000 married, the deduction will start phasing out, aka shrinking.
- If you are self-employed, your deduction cannot be more than your business income.
- The deduction is just from federal income tax. You still pay Social Security and Medicare taxes on all of it and State taxes are a separate consideration because it varies by state.
What additional items we’ll need from you:
- Final Paystub - Because your 2025 W-2 won’t have a dedicated box for tips (the draft for 2026 does, thankfully) you’ll want to check your final paystub for the year. Your employer should have tips stated separately. Be sure to consider any job changes because the final pay stub for all employers at which you received tips will be needed if you want to maximize the deduction.
- Alternative documentation - If your paystubs don’t show the amount for tips specifically, the IRS is allowing you to use “reasonable methods” for 2025, like self-created logs or POS reports with no penalty if the calculation isn’t perfect. As long as it's reasonable.
The Overtime Part
The basics:
If you're a W-2 employee who works over 40 hours a week, you can deduct up to $12,500 (single) or $25,000 (married) of your overtime pay! This is available if you itemize or take the standard deduction.
The catch:
- Not all overtime qualifies. Only overtime required by the FLSA. That means:
- If you are classified as an “exempt” employee” you do not get the deduction.
- You must work over 40 hours in a single workweek.
- Daily overtime, state mandated, or employer offered overtime that is more generous than the federal requirements are not eligible.
- The overtime must be reported on a W-2 or 1099 or other statement given to you by the payor.
- You can only deduct the "extra half" part of time-and-a-half pay, they call it the “premium”
Example: You make $20/hour normally, so overtime is $30/hour. You can only deduct that extra $10/hour, not the full $30 to get to the maximum.
- If you are married you must file a joint return to claim the deduction
- If you make over $150,000 single or $300,0000 married, the deduction will start phasing out, aka shrinking.
- The deduction is just from federal income tax. You still pay Social Security and Medicare taxes on all of it and State taxes are a separate consideration because it varies by state.
What additional items we’ll need from you:
- Final Paystub - If your 2025 W-2 doesn’t show qualified overtime in Box 14 you’ll want to check your final paystub for the year. Most employers didn’t have enough time to implement the tax changes to report 2025 in a way that makes it easy for you. The final paystub should show regular vs. overtime hours worked and their rates.
- Alternative documentation - If your paystubs don’t show overtime separately, you might need to get your timesheets or punch clock records and create a written summary with:
- Total overtime hours worked over the standard 40/week for the year,
- Your hourly rate
- Your OT rate (it’s likely 1.5x)
- Confirmation that you are classified by your employer as “non-exempt”
Do your best here. The IRS recognizes the transition period for 2025 will be tricky because the employer reporting is not in place and it will not impose penalties for reasonably reported deductions.
The Senior Deduction (aged 65+)
The basics:
- If you're 65 or older (or turn 65 in 2025), you get an automatic $6,000 deduction
- This one is actually straightforward—no complicated calculations
- Available whether you itemize or take the standard deduction
The catch:
- The deduction starts to phase out once your income exceeds $75,000 (single) or $150,000 (married filing jointly)
- It phases out at 6 cents per dollar over those thresholds
- Completely gone at $175,000 (single) or $250,000 (married)
- You need a valid Social Security number
- If you're married filing jointly and both spouses are 65+, you each get $6,000 (so $12,000 total)
The Car Loan Interest
The basics:
If you buy a new personal car with a loan, you can deduct some of the interest you pay! You can deduct up to $10,000 a year in interest from 2025-2028. This is available if you itemize or take the standard deduction.
The catch:
Not every car or loan qualifies. To get the deduction, you must meet all these rules:
- The Vehicle: You must have bought a brand-new car, truck, SUV, minivan, van, or motorcycle. Used vehicles don't count. It must be assembled in the USA and weigh under 14,000 pounds.
- If you need a resource for this the NHTSA (National Highway Traffic Safety Administration) has a VIN decoder website (https://www.nhtsa.gov/vin-decoder)
- Put the VIN in for the vehicle in question and check the weight, and “plant information” to get that info.
- The Loan: The loan must start after Dec. 31, 2024. It has to be a purchase loan (leases don't count) and must be for personal use only (not business).
- The Income Limit: If you make over $100,000 (single) or $200,000 (married, filing jointly), the deduction starts to shrink (phase out).
- Married Filing: If you are married, you must file a joint return to claim the full deduction.
What additional items we’ll need from you:
- 1099-INT from your lender showing the total interest you paid for the year.
- Your Vehicle's VIN: We'll need the full 17-digit number to report on your return. You can find it on your registration, title, or inside the driver's side door jamb.
- Final Assembly Proof: You’ll want to confirm your vehicle was finally assembled in the USA. The easiest way is to use the free NHTSA VIN Decoder tool provided above.
- Loan Documentation: Have your loan agreement handy to confirm the origination date is 2025 or later and that it’s a secured purchase loan (not a lease or cash-out refinance).
