The Daily Deduction · Issue No. 5 · November 8, 2026
The Paycheck Deductions Nobody Announced
The 2025 law put two deductions inside the paychecks of tipped and overtime workers — worth up to $25,000 and $12,500 a year — and almost nobody announced them. What counts, what does not, and why your 2025 W-2 may not show the numbers.
Education only — not personal tax advice. Personal questions route to a credentialed pro.
Figures verified against IRS sources · Tax-year tables 2016–2026 · Re-verified each season by the Update Engine · Last review: November 7, 2026
Tips: a deduction wearing a slogan
“No tax on tips” is a deduction, not an exemption — claimed when you file, not withheld during the year, and worth up to $25,000 of qualified tips for 2025 through 2028 (Internal Revenue Code §224). Your tips still owe Social Security and Medicare tax; it is the income tax that shrinks. The gates: your occupation must be on the IRS's list of occupations that customarily and regularly received tips on or before December 31, 2024 — servers, bartenders, salon workers, drivers, and more than 70 others — and the tips must be voluntary. Cash or charged, including tip pools, counts; a mandatory service charge added by the house never does.
Where to look for them: Form W-2, a 1099, or your own Form 4137 for tips you reported yourself. If you are self-employed, the deduction cannot exceed the net income of the business that earned the tips, and tips earned in a specified service trade or business — health, law, consulting, financial services — are excluded outright. The cap fades with income: $100 less for every $1,000 of modified AGI over $150,000 ($300,000 on a joint return), and married workers must file jointly to claim it at all.
Overtime: only the half counts
The overtime deduction (§225) is narrower than its headline, and the narrowing is the whole lesson. You may deduct up to $12,500 a year — $25,000 filing jointly — but only of qualified overtime compensation: the premium the Fair Labor Standards Act requires, which is the extra “half” of time-and-a-half for hours past 40 in a week. Earn $24 an hour straight time and $36 on overtime, and the deductible piece is $12 an hour. The straight-time $24 never counts, and neither do the richer premiums some employers pay on top — the second half of double time, daily overtime required only by a state, contract extras above the federal floor.
Same phase-out as tips, same file-jointly rule if you are married, same 2028 expiration. And the same honest label: this is a deduction at filing time, worth your tax bracket times the amount — real money, sized in hundreds for most hourly workers, not the whole overtime paycheck tax-free.
Why 2025 is the do-it-yourself year
One wrinkle decides whether this filing season is easy or archaeology: for 2025, the IRS let employers off the reporting hook. Notice 2025-62 waived the penalties for not stating tips and overtime premium separately on 2025 forms — the W-2 was never redesigned in time — and Notice 2025-69 tells workers how to figure their own 2025 amounts from pay stubs and records instead. From 2026 the numbers ride on the W-2 itself (tips in box 12, code TP; overtime premium in box 12, code TT). Both deductions are claimed on the new Schedule 1-A (Form 1040), whether or not you itemize.
So the two-minute move for 2025: keep your final pay stub and your tip records. They are the documentation behind this year's Schedule 1-A — and both deductions expire after 2028, so the years to claim them are this one and three more.
Sources: Internal Revenue Code §§224–225 (P.L. 119-21); IRS Fact Sheet FS-2025-03, “Tax deductions for working Americans and seniors”; IRS Tax Tip 2026-06; IRS Notices 2025-62 and 2025-69, irs.gov.
Open Money Nobody Knew — all four new deductions and the unclaimed business credits →
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