While tax news is often associated with the filing of tax returns in the spring, a recent federal legislative development brings a refreshing breeze of positive change this summer for many workers, especially those in the hospitality industry. On July 4, 2025, President Trump signed the “One Big Beautiful Bill Act” (OBBBA) into law. Tucked within this sweeping legislation are two significant, temporary, tax deductions for income earned from tips and overtime. These changes are effective retroactively to January 1, 2025, and are set to remain in effect through December 31, 2028, unless extended by congress.Before diving into the specifics, we feel it important to note that married individuals can only take advantage of these deductions if they file a joint return.No Federal Income Tax on TipsA key provision of the OBBBA creates a new federal income tax deduction for tip income. While this serves as a welcome surprise, it’s important for tipped employees and employers alike to note that this is elimination of federal income taxes on tips will be realized by tipped employees when they file their annual tax return, and they shouldn’t expect to see an increase in their regular pay checks. Employers will continue to withhold federal income tax, Social Security, Medicare, and state and local taxes from tips as they always have.When qualifying tipped employees file their federal tax return, they will first report their total tip income separately from other income and then take a deduction equivalent to that tip income (subject to some caveats detailed below), which will lower their overall federal income tax liability, and result in a larger refund. This deduction applies only to federal income tax and does not affect an employee’s obligations for Social Security, Medicare, or any state and local taxes on tip income.As referenced above, there are limits to this deduction. The law allows an individual to deduct up to $25,000 in “qualified tips” each year, and the deduction amount is gradually reduced by $100 for each $1,000 an individual earns over an adjusted gross income of $150,000, or $300,000 for married couples filing jointly. The OBBBA defines “qualified tips” as those received from customers (whether in physical cash, from credit/debit cards, or as part of a tip-sharing arrangement) in an occupation that customarily received tips as of the end of 2024. While positions like servers, bartenders, and hair stylists are clearly included, the federal government is expected to issue more detailed guidance on all qualifying occupations by the end of October 2025.No Federal Income Tax on OvertimeThe OBBBA also provides a new deduction for “qualified overtime compensation,” with “qualified overtime compensation” defined as the extra half-time pay for hours worked over 40 in a week under the Fair Labor Standards Act. As with the tip provision, employers withholding on a tipped employee’s paycheck will not change; the tax relief for overtime is similarly claimed as a deduction on an employee’s tax return. Again, syncing up with the tip provision, this deduction is exclusively for federal income tax and does not alter what is owed for Social Security, Medicare, or any state and local taxes on overtime pay.The deduction for overtime pay is capped at $12,500 per year for individuals and $25,000 for married couples filing jointly. The same income-based phase-outs that apply to the tip deduction are also in effect here, with an identical reduction of $100 for every $1,000 earned over an adjusted gross income of $150,000 for individuals and $300,000 for married couples filing jointly.We expect further clarification from the IRS on the implementation and applicability of these deductions and will continue to provide updates as more information becomes available. If you have any questions, please reach out to your Gross McGinley attorney to discuss your specific situation.