IRS releases guidance for Trump’s tips, overtime deductions

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

The guidance released last week covers how to report these deductions on tax returns. But workers could still face questions at tax time, experts say. 

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

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

Workers can deduct tips or overtime pay if those earnings are reported via so-called information returns, such as Forms W-2 or 1099, according to the legislation.

While the IRS is “strongly encouraging” employers to provide this reporting, it’s not required for tax year 2025, said Thomas Gorczynski, a Tempe, Arizona-based enrolled agent, which is a tax license to practice before the IRS.

Gorczynski, who also educates tax professionals on legislation changes, said: “We’re going to have this hodgepodge, weird year of rules that’s going to make reporting very difficult for employees.”

Approximately 6 million workers report tipped wages, according to IRS estimates. And nationally, about 6% of workers reported overtime pay in 2024, according to the Peter G. Peterson Foundation, an economic organization.

These taxpayers will soon have to navigate Trump’s tip and overtime deductions for 2025, which apply to their returns filed in 2026.  

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

The new IRS guidance also includes “transition relief” for certain workers who receive tips via a so-called “specified service trade or businesses,” or SSTBs.

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

SSTB workers are excluded from claiming the new tip deduction under Trump’s “big beautiful bill.” But these workers may briefly be eligible for the tip deduction until the Treasury Department and IRS finalize regulations.

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

It’s a “temporary waiver” for some SSTB workers to claim the tip deduction for 2025, he said. But there could be an “unhappy surprise” in 2026 and future years if eligibility goes away.