IRS releases guidance for Trump’s tips, overtime deductions

As tax season approaches, the IRS has released guidance for workers who can claim federal deductions for tips and overtime pay, enacted through President Donald Trump’s “big beautiful bill.”

Guidance published last week It explains how to report these deductions on tax returns. But experts say workers may still face questions at tax time.

The tip provision allows some employees to deduct up to $25,000 in “qualified tips” from 2025 through 2028. The tax break phases out when modified adjusted gross income exceeds $150,000, or $300,000 for married couples filing jointly.

Meanwhile, Trump’s tax break for qualified overtime pay offers a deduction of up to $12,500 for single filers or $25,000 for joint filers, with the same income phaseout. This provision is also temporary and is valid from 2025 to 2028.

Under the legislation, workers can deduct tips or overtime pay if those earnings are reported through so-called information returns, such as W-2 or 1099 Forms.

While the IRS “strongly encourages” employers to provide this reporting, it is not required for the 2025 tax year, said Thomas Gorczynski, a registered agent based in Tempe, Ariz., who has a tax license to practice with the IRS.

Gorczynski, who also trains tax professionals on legislative changes, said: “We’re going to have a year full of complex and strange rules that will make reporting very difficult for employees.”

Approximately 6 million workers Report tipped wagesAccording to IRS estimates. And about 6% of workers nationwide reported overtime pay By 2024, according to the Peter G. Peterson Foundation, an economic organization.

These taxpayers will soon have to deal with Trump’s tip and overtime deductions for 2025, and those deductions will apply to their returns in 2026.

“Taxpayer confusion regarding these provisions will be unusual at tax time,” said Terry Lemons, former chief communications and liaison officer for the IRS. he said in a LinkedIn post last week.

The new IRS guidance also includes “transitional assistance” for some employees who receive tips through a method called “transitional assistance.”specified service trades or businesses,” or SSTBs.

Trump’s 2017 tax law outlined a list of SSTBs that limit eligibility for the 20% deduction for certain businesses and includes industries such as health care, legal, financial services, performing arts and more.

SSTB employees will not benefit from the new tip deduction under Trump’s “big beautiful bill”. But these workers briefly it may be suitable for tip deduction until the Treasury Department and IRS finalize regulations.

“I don’t want people to think that this new waiver is a permanent provision or permanent guidance,” Gorczynski said. he said.

He said some SSTB employees’ request for a tip deduction for 2025 was a “temporary waiver.” However, if eligibility is eliminated, an “unhappy surprise” may occur in 2026 and future years.