Tips & Overtime Deduction Calculator

How the Tips & Overtime Deduction Calculator works

The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, created two temporary above-the-line deductions for tax years 2025 through 2028: one for qualified tips, one for qualified overtime pay. This tool estimates how much of each you can deduct once the income-based phase-out is applied, and roughly how much that saves you in federal income tax.

The formula

Each cap ($25,000 for tips, $12,500 / $25,000 for overtime) shrinks by $100 for every complete $1,000 your MAGI sits above $150,000 (single) or $300,000 (married filing jointly). The increments are rounded down, so being $999 over a $1,000 mark doesn't trigger an extra reduction. Below the threshold, the only limit is the cap itself and how much you actually earned.

Worked example

A single filer with $160,000 MAGI is $10,000 over the $150,000 threshold — exactly 10 increments of $1,000, reducing each cap by $10 × $100 = $1,000. Their tips deduction cap drops from $25,000 to $24,000, and their overtime deduction cap drops from $12,500 to $11,500. If they earned $30,000 in tips and $15,000 in overtime, they can only deduct the reduced caps: $24,000 + $11,500 = $35,500 total, not the full $45,000 they earned.

Common mistakes

• Assuming the tips cap doubles for married couples like the overtime cap does — it doesn't. It stays $25,000 per return either way.
• Deducting the full overtime paycheck instead of just the premium “half” portion above your regular rate.
• Forgetting these deductions don't reduce Social Security or Medicare taxes — only federal income tax.
• Rounding the phase-out increments up instead of down — the IRS example rounds $40,500 over the threshold down to 40 increments, not up to 41.

Frequently asked questions

What actually moves this number

Specific levers, and roughly what each one is worth. Not “save more” — the things that change the figure above by an amount you can measure.

• Your paycheck does not change — the return does

  These are deductions claimed at filing, not exemptions from withholding. Budgeting as though take-home pay will rise is the mistake to avoid; the benefit arrives as a smaller tax bill or a larger refund.

• Keep your own record of tips and overtime hours

  The deduction depends on properly reported amounts. Your own log, reconciled against pay stubs each month, is what makes the claim defensible and catches employer reporting errors while they are still fixable.

• Check occupation eligibility, not just the income

  The tip provision applies to occupations that customarily and regularly received tips, which is narrower than the headlines implied. Confirm yours is covered before planning around it.

• State tax is a separate question

  A federal deduction does not automatically reduce state taxable income. Some states conform to the federal treatment and some do not, so check your state before assuming the full benefit.

What this calculator does not cover

Every calculator simplifies, and the useful thing is knowing exactly where. These are the specific gaps between this estimate and your real situation:

• These are deductions on your federal return, not exemptions from withholding. Your paycheck does not change; the benefit arrives at filing.
• Eligibility depends on occupation, income thresholds, and the definitions in the statute, which are narrower than the headlines suggest.
• State treatment is separate. A federal deduction does not automatically reduce state taxable income.
• The provisions have scheduled expiry dates, so a benefit available this year may not be available in a later one.

For anything that turns on an exact figure, use the primary sources below or a qualified professional. How these limits are decided and disclosed is described in the editorial standards.