No Tax on Tips and Overtime: What It Really Saves You

All four are deductions, which means they reduce the income your federal tax is worked out on. They don't remove the tax on that money altogether, and they don't touch Social Security or Medicare. The helpful part is that you can claim them on top of the standard deduction, so you don't need to itemize to benefit.

They are also temporary. Each one applies to tax years 2025, 2026, 2027 and 2028, and then stops unless Congress extends it. You'll need a valid Social Security number on the return to claim them, and a married couple has to file jointly to claim the tips deduction.

• Tips: up to $25,000 a year of reported tips.
• Overtime: up to $12,500 a year ($25,000 on a joint return), but only the premium part of overtime pay.
• Seniors: $6,000 for each person aged 65 or over.
• Car loan interest: up to $10,000 a year on a loan for a new, US-assembled vehicle bought after 2024.

Take a single server who earns $36,000 in 2026, of which $14,000 is tips reported to her employer. After the $16,100 standard deduction she would normally pay federal income tax on $19,900, which comes to $2,140.

With the tips deduction, her taxable income drops to $5,900 and her federal income tax to $590. That's a saving of $1,550 for the year. What doesn't change is the $2,754 that comes out for Social Security and Medicare, because those are charged on all of her pay, tips included.

Tips count whether a customer pays in cash or adds them to a card, and tips shared through a tip pool count too. The tip has to be voluntary, so a mandatory service charge added to the bill doesn't qualify, and the job has to be one where tipping was already customary before 2025.

This is the part most people get wrong. The overtime deduction doesn't cover your overtime pay. It covers the premium, the extra half in "time and a half", on overtime your employer has to pay under federal wage law.

Picture someone paid $26 an hour who works 260 hours of overtime in a year. Those hours pay $39 each, $10,140 in total, and it would be natural to assume all of that is now deductible. It isn't. The deductible part is the extra $13 an hour, which comes to $3,380.

On a total income of $64,220, that deduction cuts his federal income tax from $5,526.40 to $5,120.80, a saving of $405.60. If he had expected the whole $10,140 to be deductible, he'd have been counting on a saving of $1,216.80, roughly three times what he'll actually see.

If you're 65 or older by the end of the year, you can deduct an extra $6,000, and a married couple who are both 65 or over can deduct $12,000. For a couple in the 12% bracket, that's $1,440 off their tax bill. The deduction starts to shrink once income passes $75,000 for a single person ($150,000 for a couple), by 6% of the amount over that line. A single retiree with $95,000 of income would get $4,800 rather than the full $6,000.

The car loan deduction is narrower than it sounds. It only covers interest on a loan for a new vehicle, assembled in the United States, bought after 2024 for personal use. Leases and used cars don't count, and you'll need the car's VIN on your return. On a $36,000 loan at 7.5% over six years, the first year's interest is about $2,533, which saves around $304 in the 12% bracket or $557 in the 22% bracket. The deduction is reduced by $200 for every $1,000 of income above $100,000 ($200,000 for couples), so it disappears quickly for higher earners.

Your employer works out your withholding from your Form W-4, and unless you tell it otherwise, it assumes the standard deduction and nothing more. So even if you qualify for one of these deductions, your paychecks probably haven't been adjusted for it, and the tax you've overpaid comes back to you as a larger refund when you file.

If you'd rather have the money through the year, the 2026 Form W-4 now has a worksheet for exactly this. Entering the deductions you expect in Step 4(b) lowers your withholding from the next paycheck onwards. Either way, you can see the effect on your own numbers with the Federal Tax Refund Calculator.

It's worth being clear about the limits, so the refund doesn't come as a disappointment.

• Social Security and Medicare are still charged on all of your tips and overtime, at 7.65% for most employees.
• State income tax is a separate decision for each state, and not every state follows the federal deductions.
• The tips and overtime deductions shrink by $100 for every $1,000 of income above $150,000 ($300,000 for couples).
• All four end after the 2028 tax year unless Congress extends them.

If you itemize, the cap on deducting state and local taxes is $40,400 for 2026, up from the $10,000 limit that applied for years. It's reduced once income passes $505,000, though never below $10,000. If you have children, the child tax credit is $2,200 per qualifying child for 2026, and up to $1,700 of it can be paid to you even if you owe no tax.