President Donald Trump’s signature “one big beautiful bill” promises to let workers keep more of what they earn by making tips and overtime wages — tax-free.
For the hundreds of thousands who rely on those “extras” to pay the bills, that sounds like a big deal.
But who actually benefits? The answer depends on how much you make and how much you already pay in federal income tax.
Here’s what to know:
How does no tax on overtime work?
Now that President Donald Trump signed the bill, workers will be able to deduct up to $25,000 in reported tips and $12,500 in overtime pay from their taxable income on their federal tax returns.
This means you won’t see an immediate boost in your take-home pay — taxes will still come out of your paycheck — but when you file for 2025 early next year, the deduction could lower your tax bill or increase your refund.
The deductions are temporary and set to expire at the end of 2028 unless extended.
The tax break sounds universal, but it’s slanted toward middle- and higher-income earners — workers who owe enough federal income tax for the deductions to make a real difference.
Here’s some mathematical examples:
For example, a police officer earning a $75,000 base salary and another $15,000 from overtime would pay federal income taxes on only $2,500 of those extra earnings.
A high-end restaurant sommelier earning an $80,000 salary and collecting generous tips could hit the cap on tip deductions and still save thousands on their tax bill.
Earning more than the thresholds — $12,500 in overtime and $25,000 in tips — doesn’t wipe out the benefit. It just means anything above those limits is fully taxed.
Midrange earners stand to see meaningful savings, too. A warehouse supervisor earning $60,000 with $10,000 in overtime could shave a couple thousand dollars off their federal tax bill. A hotel bartender making $45,000 plus $5,000 in tips could get back all the federal taxes withheld from their tips.
For lower-income workers, the impact is more modest. A retail employee earning $28,000 with some overtime, or a diner server making $20,000 in wages and tips, could deduct all of their extra earnings — but with incomes low enough that standard deductions already erase most federal taxes, their refunds might grow by only a few hundred dollars.
What about state income taxes?
It’s important to note this isn’t an immediate paycheck change. Employers will still withhold federal taxes from tips and OT throughout 2025. Workers will see the savings when they file their taxes in early 2026.
And state income taxes still apply, so you won’t see those overtime and tip deductions on your state returns next April.
Contributing: Linda Roy, producer planner
This article originally appeared on NorthJersey.com: What is the tax break for Illinoisans who earn tips or overtime? Here’s the math
Reporting by J. Staas Haught, USA TODAY NETWORK / NorthJersey.com
USA TODAY Network via Reuters Connect
