President Signs Bill to Eliminate Federal Taxes on Tips and Overtime—But Not Right Away

A new federal law aims to deliver on a major campaign promise: eliminating federal income taxes on tips and overtime pay. President Trump signed the One Big Beautiful Bill Act on July 4th, officially making the tax break law.

But experts say workers won’t see those savings immediately. According to tax professionals, employers will continue withholding federal taxes on tips and overtime pay through the end of 2025. Workers will instead claim the benefit when filing their 2025 federal tax returns next year—either as a larger refund or a reduced tax bill.

“There’s no benefit right now. It’s going to be when they file their tax return,” explained Tom O’Sabin of the National Association of Tax Professionals.

The IRS is still clarifying certain rules, but here’s what’s confirmed so far:

• Workers in tip-earning jobs can deduct up to $25,000 in tip income on their 2025 federal tax return.

• Workers who earn overtime pay can deduct up to $12,500 of that extra income.

• Income limits apply, and the tax break is set to last through the end of 2028.

O’Sabin notes that accurate record-keeping will be essential: “Documentation becomes even more important. Otherwise, the deduction won’t apply because it could be challenged by the IRS and disallowed.”

It’s also important to note that this change only affects federal taxes. State income taxes on tips and overtime will still apply unless individual states pass similar measures.

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