No tax on tips and overtime: what you actually keep in 2026

"No tax on tips" is a federal income-tax deduction, not an exemption: up to $25,000 of qualified tips and up to $12,500 of overtime premium pay ($25,000 on a joint return) come off your taxable income for 2025 through 2028. Social Security still comes out of every tipped and overtime dollar up to the Social Security wage base, Medicare out of every dollar, and most states still tax them too.

What the tips deduction covers

Qualified tips are the voluntary cash and card tips reported from an occupation that customarily receives them. The cap is $25,000 per return, the same for singles and couples, and it phases out by $100 for every $1,000 of income above $150,000 ($300,000 joint). At $400,000 of income for single filers, or $550,000 for joint filers, it is gone entirely. Married couples must file jointly to claim it, and the deduction is available whether or not you itemize.

What the overtime deduction covers, and what it does not

Only the premium half of federally required time-and-a-half qualifies. Work 10 overtime hours at $30 instead of your regular $20: the $100 of extra "half" pay counts, the $200 of regular-rate pay in those hours does not. The cap is $12,500 ($25,000 joint), with the same phase-out as tips.

Why your paycheck still shrinks

Both deductions touch federal income tax only. Social Security (6.2%) still applies to every dollar of tips and overtime up to the $184,500 Social Security wage base, and Medicare (1.45%) to every dollar. States that start from federal adjusted gross income, which is most of them, still tax the full amount, because the deduction sits below the AGI line. Nothing changes in your paycheck withholding mid-year unless you adjust your W-4; the benefit usually arrives in your refund.

A worked example

A single server earns $60,000, of which $8,000 is reported tips. Federal income tax without the deduction would be $5,020 in 2026. With the $8,000 tips deduction, taxable income drops from $43,900 to $35,900 and the tax falls to $4,060. The saving is $960, exactly 12 cents per tipped dollar, because that income sat in the 12% bracket. FICA stays at $4,590 either way.

The other two 2026 deductions worth knowing

The same law added a $10,000 deduction for interest on a new US-assembled car loan (phasing out from $100,000 of income, $200,000 joint) and a $6,000 senior deduction per person 65 or older (phasing out at 6 cents per dollar above $75,000, $150,000 joint), on top of the regular extra standard deduction for seniors. All four run 2025 through 2028.

See it in your own numbers

The US paycheck calculator has fields for tips, overtime premium, car-loan interest and age 65+ under "2026 extras", and shows exactly how much each deduction saves at your salary, in your state.

Frequently asked questions

Are tips now completely tax-free?

No. Federal income tax on up to $25,000 of qualified tips can reach zero, but Social Security (up to the wage base), Medicare and most state income taxes still apply.

Does all my overtime pay qualify?

No, only the premium portion required by federal law. For time-and-a-half, that is one third of each overtime paycheck dollar.

Do I need to itemize?

No. All four 2026 deductions are claimed on the new Schedule 1-A and work alongside the standard deduction.

Based on P.L. 119-21 and IRS guidance for tax year 2026. Figures are not indexed for inflation through 2028. Last updated 2026-11-04.