Understanding the No Tax on Tips and Overtime Provisions in the One Big Beautiful Bill (OBBB)
On July 4, 2025, President Donald Trump signed the One Big Beautiful Bill (OBBB) into law, introducing significant tax relief for workers, including public safety labor union members like firefighters, police officers, and paramedics. Among its key provisions are deductions for qualified tips and overtime pay, designed to increase the take-home pay for those who rely on these income sources. This blog post explains how these deductions work, how they enhance the value of overtime (OT), and what they mean for joint filers earning over $300,000, including details on the phase-out and expiration date.
No Tax on Tips: What It Means for Union Members
The OBBB allows workers in tipped occupations to deduct up to $25,000 of qualified tip income from their federal taxable income for tax years 2025 through 2028. Here’s how it works:
Eligibility: The deduction applies to tips received in industries where tipping is customary, such as food service or hospitality. The IRS will provide further guidance on qualifying occupations.
Deduction Amount: Up to $25,000 per year can be deducted, regardless of whether you itemize or take the standard deduction.
Reporting: Tips must be reported on Form W-2 or Form 1099, and employers must separately report the total amount of cash tips.
Payroll Taxes: The deduction applies only to federal income taxes, not Social Security or Medicare taxes.
For tipped employees, this deduction could save up to $3,000–$6,000 annually, depending on their tax bracket. For example, an employee earning $15,000 in tips from a part-time restaurant job could deduct that entire amount, reducing their taxable income and potentially saving $1,800–$3,300 in federal income taxes (assuming a 12%–22% tax bracket).
No Tax on Overtime: Boosting the Value of OT for Public Safety Employees
The OBBB’s “No Tax on Overtime” provision is particularly relevant for peace officers and firefighter, who often rely on overtime to meet staffing demands. This provision allows workers to deduct up to $12,500 ($25,000 for joint filers) of qualified overtime compensation from their federal taxable income for tax years 2025 through 2028. Here’s a breakdown:
Eligibility: The deduction applies to overtime pay required under Section 7 of the Fair Labor Standards Act (FLSA), which mandates time-and-a-half pay for hours worked over 40 per week for non-exempt employees. Most public safety workers, such as firefighters and police officers, qualify as non-exempt under FLSA.
Deduction Amount: Single filers can deduct up to $12,500, while joint filers can deduct up to $25,000 of qualified overtime pay. Only the overtime premium (the amount exceeding the regular rate) qualifies. For example, if you earn $30/hour and work 10 overtime hours at $45/hour, only the $15/hour premium ($150 total) counts toward the deduction, not the full $450.
Reporting: Employers must report qualified overtime separately on Form W-2, and the deduction is only available for reported amounts.
Payroll Taxes: Like the tip deduction, this applies only to federal income taxes, not Social Security or Medicare taxes.
How It Increases the Value of Overtime
For public safety employees, overtime is a critical income source, often comprising 20–30% of annual earnings. By exempting up to $12,500 ($25,000 for joint filers) of overtime pay from federal income taxes, the OBBB effectively increases the after-tax value of OT. For example:
Scenario: A police officer earns $150,000 in regular wages and $30,000 in overtime premium pay. Without the deduction, the $30,000 is taxed at their marginal rate (e.g., 24%, or $7,200 in taxes). With the OBBB deduction, $12,500 of the $30,000 is tax-free for federal income tax purposes for single filers (or $25,000 for joint filers), saving $3,000 (single, 24% bracket) or $6,000 (joint, 24% bracket).
Impact: This tax savings increases the officer’s take-home pay, making overtime shifts more financially rewarding. The White House estimates average savings of up to $2,000 annually for qualifying workers, though the Tax Policy Center estimates average savings of $1,800.
For union members, this provision incentivizes taking on overtime shifts, especially in high-demand public safety roles, while boosting financial security.
Joint Filers Earning Over $300,000: Phase-Out Calculation
For joint filers with modified adjusted gross income (MAGI) exceeding $300,000, both the tip and overtime deductions phase out. MAGI is calculated as adjusted gross income (AGI) plus certain exclusions (e.g., foreign income under Code sections 911, 931, or 933). Here’s how the phase-out works:
Phase-Out Mechanism: The deduction is reduced by $100 for every $1,000 of MAGI above $300,000 for joint filers.
Calculation Example:
A firefighter and their spouse file jointly with a MAGI of $350,000, including $20,000 in qualified overtime pay.
Excess MAGI: $350,000 – $300,000 = $50,000.
Reduction: ($50,000 ÷ $1,000) × $100 = $5,000.
Deduction: $25,000 (max for joint filers) – $5,000 = $20,000.
Result: They can deduct $20,000 of the $20,000 overtime pay, fully eliminating federal income tax on it.
Complete Phase-Out: The deduction is fully phased out when MAGI reaches $550,000 ($300,000 + $250,000, as $25,000 ÷ $100 × 1,000 = $250,000). At this point, no deduction is available.
For high-earning joint filers, the phase-out limits the benefit, but partial deductions can still provide significant savings. For example, a couple with $400,000 MAGI could deduct $15,000 of overtime pay, saving $3,300–$5,550 in taxes (assuming a 22%–37% tax bracket).
Expiration Date
Both the tip and overtime deductions are temporary, effective for tax years 2025 through 2028. They expire on December 31, 2028, unless Congress extends them. This means the last tax returns to claim these deductions will be filed in early 2029. Union members should plan accordingly, as the tax benefits may not persist beyond 2028.
Practical Implications for Public Safety Union Members
Increased Take-Home Pay: The overtime deduction directly boosts the value of OT shifts, making them more lucrative. This is especially beneficial for public safety employees facing mandatory overtime due to staffing shortages.
Reporting Requirements: Ensure your employer correctly reports overtime pay on Form W-2. Check pay stubs and W-2s for separate reporting of qualified overtime to maximize your deduction.
Tax Planning: Consult a tax professional to understand how these deductions interact with your overall tax situation, especially if you’re a joint filer nearing or exceeding $300,000 MAGI.
Side Gigs: If you work a tipped side job, such as ridesharing, track your tips meticulously to claim the full $25,000 deduction.
Caveats and Considerations
Limited Benefit for Low-Income Workers: Workers with incomes below the standard deduction ($15,750 for single filers, $31,500 for joint filers in 2025) may see little benefit, as their federal tax liability is already low.
Payroll Tax Burden: Social Security and Medicare taxes still apply, reducing the net benefit. For example, $10,000 in overtime incurs $765 in payroll taxes (7.65%).
Potential Labor Market Effects: Some analysts warn that the overtime deduction could encourage employers to rely more on OT rather than hiring additional staff, potentially increasing workload pressures.
Conclusion
The OBBB’s no tax on tips and overtime provisions offer meaningful tax relief for public safety labor union members, particularly those earning significant overtime. By deducting up to $12,500 ($25,000 for joint filers) of overtime pay, workers can save up to $2,000–$5,550 annually, depending on their tax bracket and income. For joint filers earning over $300,000, the phase-out reduces the deduction, but partial benefits remain until MAGI reaches $550,000. These deductions, effective through 2028, enhance the financial value of overtime, providing financial support to the hardworking men and women who keep our communities safe.
For personalized advice, consult a tax professional to maximize these benefits.
