No Tax on Tips and Overtime: How to Claim It on Your 2026 Return

Straight answer: on your 2026 federal return you can deduct up to $25,000 of qualified tips and up to $12,500 of qualified overtime premium pay ($25,000 if married filing jointly) on Schedule 1-A, whether or not you itemize — but both deductions shrink once your income passes $150,000 ($300,000 joint), you must file jointly if married, and Social Security and Medicare taxes still apply. For 2026, the numbers you need should be printed on your W-2 or 1099 for the first time.

Here's how it works, what qualifies, how 2026 reporting differs from last year, and the mistakes that will cost you the deduction.

What did the One Big Beautiful Bill Act actually create?

The law signed July 4, 2025 added two new federal income tax deductions for tax years 2025 through 2028. Unless Congress extends them, your 2028 return is the last one with these deductions. The IRS now groups them under the "Working Families Tax Cuts" banner.

Neither one makes tips or overtime fully "tax-free." They are deductions: they reduce your taxable income for federal income tax. They don't change your wages for payroll tax purposes.

Key rules from the IRS overview of the new deductions:

• Available whether you itemize or take the standard deduction.
• You need a Social Security number valid for employment, issued before your return's due date (including extensions).
• Married? You must file jointly. Married filing separately can't claim either deduction.
• Single and head of household filers qualify on the same terms.

How much can you deduct, and when does it phase out?

	No tax on tips	No tax on overtime
Maximum deduction	$25,000 per return	$12,500 ($25,000 married filing jointly)
Phase-out starts (MAGI)	Over $150,000 ($300,000 joint)	Over $150,000 ($300,000 joint)
Reduction	$100 per full $1,000 over the threshold	$100 per full $1,000 over the threshold
Max deduction fully gone at	$400,000 single / $550,000 joint	$275,000 single / $550,000 joint
Years	2025–2028	2025–2028
Payroll (FICA) tax still owed?	Yes	Yes

Figures as of October 2026, from the draft 2026 Schedule 1-A and IRS guidance. These caps aren't inflation-adjusted. The "fully gone" line assumes you claim the maximum; a smaller deduction disappears sooner.

MAGI here is basically your adjusted gross income (Form 1040 line 11b on the draft form), plus a few excluded items like foreign earned income that most workers won't have. On the form, you divide the excess by $1,000 and round down, then multiply by $100. So $12,500 over the line costs you $1,200, not $1,250.

Which tips qualify?

"Qualified tips" have to clear three bars:

1. Your job is on the Treasury list. In final regulations issued April 10, 2026, Treasury listed more than 70 occupations that customarily received tips on or before December 31, 2024, in eight groups: beverage and food service, entertainment and events, hospitality and guest services, home services, personal services, personal appearance and wellness, recreation and instruction, and transportation and delivery. The final list added visual artists, floral designers, and gas pump attendants. Check yours at IRS.gov/TippedOccupations.
2. The tip was voluntary. Cash or card tips from customers, or through a tip-sharing or tip pool, count. A mandatory service charge the customer can't change or skip generally doesn't.
3. It's reported. On a W-2, 1099, or on Form 4137 (the form for tips you didn't report to your employer).

If you're self-employed (say, a rideshare driver or independent stylist), the tips deduction can't exceed your net profit from the business where you earned them. And tips earned in a "specified service trade or business" (the same category used for the qualified business income deduction) don't qualify — the IRS says that applies to the self-employed and to employees of those businesses.

What counts as "qualified overtime"?

Only the premium portion required by the federal Fair Labor Standards Act (FLSA) — generally the extra "half" you earn for hours over 40 in a workweek. Per the IRS's August 2026 overtime FAQs (FS-2026-13):

• If your employer pays double time, only the half-time premium the FLSA requires counts.
• Overtime paid under state law (like daily overtime past 8 hours), a union contract, or employer policy — but not required by the FLSA — doesn't count.
• If you're FLSA-exempt (many salaried managers, professionals, outside sales), your overtime doesn't qualify at all.

How is it reported on your 2026 W-2 or 1099?

This is the big change from last year. For 2025, employers weren't required to break out tips or overtime, so workers often had to figure the amounts themselves from pay stubs and box 7 of the W-2. That relief ended with 2025.

On 2026 forms (the ones you'll get by early 2027), per the 2026 W-2 instructions:

• W-2 box 12, code TP — cash tips reported to your employer.
• W-2 box 14b — your Treasury Tipped Occupation Code (a three-digit code). A "000" means some tips came from a nonqualifying job.
• W-2 box 12, code TT — qualified overtime.
• 1099-NEC box 1b, 1099-MISC box 13a, 1099-K box 1c — qualified tips for non-employees.
• 1099-NEC box 1d or 1099-MISC box 14 — qualified overtime, in the rare case an FLSA employee gets a 1099.

For overtime, the code TT number is now the whole story. Under the IRS FAQs, for 2026 you can't deduct more qualified overtime than your employer reports in code TT. If it's wrong or missing, you need a corrected W-2c from your employer; a substitute W-2 (Form 4852) won't work.

Which form and line do you use?

Schedule 1-A (Form 1040), "Additional Deductions."

• Part I figures your MAGI.
• Part II is no tax on tips (draft lines 4–15).
• Part III is no tax on overtime (draft lines 16–27).
• The Part VI total carries to Form 1040. That was line 13b on 2025 returns; the June 2026 draft sends it to line 13a.

Honest caveat: as of early October 2026, the IRS has only posted a draft 2026 Schedule 1-A, and the 2026 instructions aren't final. Line numbers can still move. Final forms usually post late in the year, before filing season opens; see when the 2027 tax season starts.

Worked examples

Example 1 — Server, single. Maria earns $26,000 in wages plus $14,000 in tips, all reported to her employer and shown in box 12 code TP, with a qualifying occupation code in box 14b. Her MAGI is $40,000. She deducts the full $14,000 on top of her standard deduction. If her top bracket is 12%, that saves roughly $1,680 in federal income tax. She still pays Social Security and Medicare on the full $40,000.

Example 2 — Hourly warehouse worker. Dev earns $30 an hour and works 400 overtime hours in 2026, paid at $45. His overtime pay totals $18,000, but only the $15 premium counts: 400 × $15 = $6,000 in code TT, and that's his deduction — not $18,000.

Example 3 — Phase-out. Jordan, single, has $20,000 of qualified tips and MAGI of $162,500. Excess over $150,000: $12,500. Divide by $1,000 and round down: 12. Multiply by $100: $1,200. Deduction: $20,000 − $1,200 = $18,800.

Example 4 — Couple, both with overtime. A married couple filing jointly has $28,000 of combined code TT overtime and MAGI of $310,400. Cap: $25,000. Excess over $300,000 is $10,400, rounded down to 10, so a $1,000 reduction. Deduction: $24,000. Filing separately would have given them zero.

A tipped worker who also earns overtime can claim both on the same Schedule 1-A.

Common mistakes that will cost you

• Deducting all your overtime pay instead of just the FLSA premium.
• Filing married filing separately — automatic disqualification.
• Not checking your W-2 in January. If code TT is missing or low, ask for a W-2c right away; for 2026 you can't fix it yourself on the return.
• Counting mandatory service charges or tips from a job not on the list.
• Expecting a smaller paycheck tax bite automatically. Employers still withhold on overtime. If you want less withheld, the 2026 Form W-4 step 4(b) and the IRS Tax Withholding Estimator account for the overtime deduction.
• Assuming your state follows along. State conformity varies; your state return may still tax these amounts.
• Forgetting the 2028 sunset when planning future years.

Can you claim it for free?

Often, yes. If your return is mostly W-2 wages and tips, IRS Free File and VITA volunteer sites are worth checking first. Paid help earns its fee when things get tangled: tips across W-2 and 1099 work, gig income on top of a day job, a disputed W-2, or income near the phase-out. Here's what preparation typically costs so you can decide. For the rest of what changed this year, see our 2026 brackets and standard deduction guide, and start gathering forms with the tax documents checklist.

If you'd like someone to check your W-2 codes, run the phase-out math, and make sure you get every dollar of both deductions, book a free consultation or see our tax preparation service.