Two federal deductions cut income tax on tips and overtime from 2025 through 2028. They don't make that pay tax-free, but they can save you hundreds.
At a glance
$25,000Most tips you can deduct a year
$12,500Most overtime you can deduct ($25,000 joint)
2025–2028Tax years covered
They lower federal income tax only. Social Security and Medicare still apply.
You get them with the standard deduction. No itemizing needed.
Oregon lets you subtract the same amounts on your Oregon return.
1Tips: who qualifies
Your job is on the IRS list of occupations that customarily got tips as of December 31, 2024, like servers, bartenders, hairstylists and delivery drivers.
Voluntary tips from customers count, including tips shared through a tip pool. Mandatory service charges and automatic gratuities don't.
If you're self-employed, the deduction can't be more than your profit from that work.
2Overtime: what counts
Only the extra half of time-and-a-half that federal law requires. Earn $20 an hour and get $30 for overtime? Only $10 is deducted.
Federal overtime means hours over 40 in a workweek. Daily overtime under state law and extra union-contract premiums don't count.
You must be nonexempt, meaning your employer has to pay you overtime under federal law.
3Rules for both
You need a valid Social Security number.
If you're married, you must file jointly.
Above $150,000 of modified AGI ($300,000 joint), the cap shrinks by $100 for each $1,000 over.
4How to claim it
Claim it on your federal return using the new Schedule 1-A. For 2025, employers didn't have to list qualified overtime separately on your W-2, so keep your pay stubs and any statement your employer gives you about tips or overtime.
Oregon: claim the same tip and overtime deductions as subtractions on Schedule OR-ASC with your Oregon return. Nonresidents can only count tips and overtime earned while working in Oregon.
Washington: no income tax, so there's nothing to claim. If you get SNAP or SSI, these programs still count your full pay.
Sources4 official sources · checked October 12, 2026