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Estimate your 2026 federal tip and overtime deduction under the One Big Beautiful Bill Act (OBBBA). Free, no signup — see how much the new $25K tip deduction and $12.5K/$25K overtime deduction save you after the MAGI phase-out, plus state-level savings by conformity status.
Tip deduction
$18,000
Overtime deduction
$4,000
Federal tax savings
$4,840
Total tax savings
$4,840
A Texas server with $18,000 in tips and $4,000 of overtime premium pay (well below both caps and below the $150K phase-out) gets the full $22,000 deduction. At a 22% federal marginal bracket, that saves $4,840 in federal tax. Texas has no income tax, so total savings stay at $4,840.
Source: FinCalc server-rendered example using the same formulas as the interactive calculator.
The One Big Beautiful Bill Act introduced two above-the-line deductions for tax years 2025–2028: up to $25,000 of qualified tips and up to $12.5K of overtime premium pay. The deductions phase out by $100 per $1,000 of MAGI above $150,000.
Phase-out starts at $150,000 for single filers.
Use the bracket that applies to your last dollar of income (not your effective rate).
W-2 box 7 cash tips plus reported allocated tips. Cap: $25,000.
The premium portion only — the 0.5× "half" in time-and-a-half, not the full overtime paycheck. Cap: $12,500 (single).
If you worked 200 overtime hours at a $20 regular rate and were paid $30/hour (time-and-a-half), the premium is the extra $10/hour × 200 hours = $2,000. Only that $2,000 counts — not the $6,000 of total OT pay. Your W-2 employer should report this separately on a new box for 2025 onward.
Tip deduction
$18,000
Cap: $25,000
Overtime deduction
$4,000
Cap: $12,500
Federal tax savings
$4,840
@ 22% marginal
Total tax savings
$4,840
Federal + Texas state
Texas has no individual income tax, so the federal deduction is your entire state savings — there is nothing to deduct at the state level.
Your MAGI of $62,000 is at or below the $150,000 threshold — no phase-out applies. You can claim the full deduction.
Filing as single / head of household with $18,000 in tips and $4,000 in overtime premium, you qualify for a combined $22,000 federal deduction (no phase-out applies).
At a 22% federal marginal rate, that saves you about $4,840 in federal income tax. Texas has no state income tax, so federal savings of $4,840 is the whole picture.
This is an estimate. Phase-out math, MAGI definition, and qualifying tip/overtime treatment depend on your actual return — consult a tax professional or the IRS guidance before filing.
FinCalc AI
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The One Big Beautiful Bill Act, signed in July 2025, created two new above-the-line federal deductions for tax years 2025 through 2028. "Above-the-line" means they reduce your adjusted gross income before any other math — and you do not need to itemize to claim them. Both stack on top of the standard deduction. For a tipped worker who takes the standard deduction (most of them do), this is pure new tax relief, not a substitution.
The tip deduction lets you subtract up to $25,000 of qualified tip income — voluntary cash and charged tips, plus your share of pooled tips that you actually received. Mandatory service charges (the auto-gratuity on a banquet bill) are wages, not tips, and do not qualify.
The overtime deduction is narrower than the headline. It applies only to the premium portion of overtime pay — the 0.5× "half" in time-and-a-half — not the full overtime paycheck. If you worked 200 hours of overtime at a $20 regular rate and were paid $30/hour, the premium is $10/hour × 200 = $2,000. That $2,000 is what counts toward your $12,500 single / $25,000 MFJ cap, not the $6,000 of total OT pay.
Who counts as customarily tipped per IRS guidance:
The deduction is reduced by $100 for every $1,000 of modified AGI above $150,000 (single / head of household) or $300,000 (married filing jointly). That is a 10% phase-out rate applied to the combined cap.
Worked example. A single filer with $25,000 of tips, no overtime, and $200,000 MAGI sits $50,000 over the threshold. Phase-out: $50,000 × 10% = $5,000. Their deduction drops from $25,000 to $20,000. At a 32% federal marginal bracket, that saves $6,400 in federal tax — less than the unphased $8,000 but still meaningful.
At high enough income, the deduction phases out entirely. A single filer maxing both deductions ($37,500 combined cap) is fully phased out when MAGI exceeds about $525,000; an MFJ household maxing both ($50,000 combined cap) is fully phased out around $800,000.
Most states use federal AGI as the starting point for their own income tax, so the OBBBA tip and overtime deductions automatically reduce your state taxable income too. A few states have decoupled or compute differently:
| State | Status | Note |
|---|---|---|
| California | Does NOT conform | Separate AGI computation; expect a state addback. |
| New York | Does NOT conform | Decoupled — addback required on Form IT-558. |
| New Jersey | Does NOT conform | NJ does not start from federal AGI. |
| Pennsylvania | Does NOT conform | PA uses its own compensation definition. |
| Texas, Florida, Tennessee, Nevada, Washington, Wyoming, South Dakota, Alaska | No state income tax | Federal deduction is your entire state benefit. |
| New Hampshire | No wage tax | NH taxes only dividends and interest; tip/OT wages are untaxed. |
| Most other states (40+) | Conforms | Rolling conformity with federal AGI — deduction flows through. |
Verified against state DOR guidance current as of 2026. The full per-state conformity table (50 states + DC) is encoded in the calculator and powers the state-level savings estimate.
Data and assumptions align with official publications. For verification and current figures:
The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, created two new above-the-line federal deductions effective for tax years 2025–2028: "No Tax on Tips" (up to $25,000 of qualified tip income) and "No Tax on Overtime" (up to $12,500 for single filers / $25,000 for joint filers of the overtime premium portion of pay). Both stack with the standard deduction — you do not need to itemize to claim them.
You qualify if you work in an occupation the IRS lists as "customarily and regularly" receiving tips. This covers servers, bartenders, baristas, hairstylists, barbers, nail technicians, personal trainers, hotel housekeepers, rideshare and delivery drivers, casino dealers, massage therapists, and similar tipped roles. Both W-2 employees and self-employed gig workers can claim it. Your employer or platform must report your tips correctly.
Qualified tips are voluntary cash or charged tips received from customers, plus your share of pooled tips you actually receive. Mandatory service charges (auto-gratuities) are wages, not tips, and do not qualify. Allocated tips reported in W-2 box 8 are included if you reported the income. The $25,000 cap is per taxpayer and is reduced by the MAGI phase-out.
Yes — but only your actual share. If a restaurant pools $1,000 in tips across four servers, each server can claim their $250 share, not the full pool. The deduction follows whoever actually received the tip money, which is exactly how it appears on each worker's W-2 box 7.
Most states "roll over" the federal AGI, so the deduction flows through automatically and reduces your state tax too. A handful of states have decoupled or use their own income definition: California, New York, New Jersey, and Pennsylvania do not honor the federal deduction (you will see an addback line on your state return). Nine states have no income tax at all (TX, FL, TN, NV, WA, WY, SD, AK, NH on wages) — so the federal deduction is your entire state-level benefit.
The deduction phases out by $100 for every $1,000 of MAGI above $150,000 (single) / $300,000 (MFJ) — a 10% reduction rate. So a single filer with $200,000 MAGI ($50,000 over) loses $5,000 of deduction. At high enough income, the deduction phases out entirely: a single filer is fully phased out around $525,000 MAGI if claiming both maxed deductions, lower if claiming only tips.
Yes. They are separate deductions with separate caps — you can claim up to $25,000 of tip deduction AND up to $12,500/$25,000 of overtime deduction in the same year. The MAGI phase-out applies to the combined total, not each separately, so a high earner phases out of both at the same rate.
Both deductions are scheduled to expire after tax year 2028 unless Congress extends them. They apply to tax years 2025, 2026, 2027, and 2028. Claim them on Schedule 1-A of Form 1040 — the IRS has published a dedicated schedule for the new "no tax on tips, overtime, car loans, and seniors" deductions.
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