NEWS
Congress expanded tax deductions for tips, overtime pay, and state and local taxes starting in tax year 2025, promoting the changes as broad relief for workers and homeowners. However, for many six-figure earners, high-income tax deduction phase-outs significantly limit these benefits, leaving higher-income households with far less reduction in taxable income than the headline figures suggest.
The changes were enacted as part of H.R. 1, commonly referred to as the "Big Beautiful Bill" or the "One Big Beautiful Bill," also known as the OBBBA law. Passed in July 2025, the tax legislation builds on rules established under the Tax Cuts and Jobs Act, while introducing new tax changes aimed at workers and homeowners.
The law created three significant tax deductions, effective beginning in 2025: a deduction for qualified tip income, a deduction for the premium portion of overtime pay, and an increased deduction cap for state and local taxes. Each provision is subject to income thresholds designed to limit benefits for households with higher incomes.
Under the new law, taxpayers may deduct up to $25,000 in qualified tip income each year. Eligible tips include amounts reported on Form W-2, tips reported separately to employers, and specific substantiated tips earned by self-employed workers. The deduction applies per return and does not increase for married couples filing jointly.
Workers who earn overtime may deduct the premium portion of that pay, typically the additional half required under federal labor rules. The overtime deduction is capped at $12,500 for single filers and $25,000 for joint filers, and is available regardless of whether a taxpayer claims the standard deduction or itemizes deductions.
These tax deductions can lower taxable income and reduce effective income tax rates. However, both are subject to phase-outs that limit their value as income rises.
For the tips and overtime deductions, phase-outs begin once Modified Adjusted Gross Income exceeds $150,000 for single filers or $300,000 for married couples filing jointly. Above that income threshold, the allowable deduction is reduced by 10 percent of the income exceeding the cutoff.
As income increases, the deductions decline steadily. For single filers, the tips deduction is fully phased out at approximately $400,000 of income. These rules apply regardless of occupation and affect taxpayers with incomes that include wages, bonuses, or long-term capital gains.
Tax professionals note that phase-outs can increase a taxpayer’s effective marginal rate even when federal income tax brackets remain unchanged, particularly for taxpayers with AGIs near the income cutoff.
The law temporarily raises the SALT deduction cap from $10,000 to $40,000 for tax years 2025 through 2029. Taxpayers who itemize deductions on Schedule A of Form 1040 may claim state income taxes, property taxes, or sales taxes up to the higher limit.
The SALT tax cap includes a separate phase-down for higher-income taxpayers. Taxpayers with AGIs above $500,000 see the $40,000 deduction cap reduced by 30 percent of income above that level, returning the cap to $10,000 once income reaches roughly $600,000.
As a result, many high-income taxpayers receive limited or no additional benefit from the expanded SALT deduction, even when their state income taxes and property taxes significantly exceed the cap.
Where a taxpayer lives has a significant impact on whether the expanded SALT deduction provides meaningful relief. State and local tax burdens vary widely across the country, shaping outcomes even among taxpayers with similar incomes.
Taxpayers in high-tax states, such as California, New York, and New Jersey, are more likely to benefit if their incomes remain below the phase-out threshold. In these states, itemizing deductions can once again provide greater benefit than the standard deduction.
By contrast, taxpayers in states without a broad-based income tax often see limited change. Many were already able to deduct their full property tax bill under the previous SALT tax cap, leaving little room for additional benefit.
The practical impact of the new tax changes varies sharply by income level and filing profile.
A tipped worker earning $65,000 with $18,000 in qualified tips can deduct the full amount, along with any eligible overtime premium. The deductions reduce taxable income and may result in the filer being taxed at a lower marginal rate within the federal income tax brackets.
A manager earning $175,000 may qualify for an overtime deduction, but the income threshold reduces its value. A senior executive earning $550,000 receives no benefit from tips or overtime deductions and sees the SALT deduction cap reduced well below actual taxes paid.
For taxpayers near income cutoffs, effective timing and income management can significantly impact eligibility. Deferring income, increasing retirement contributions, or adjusting bonus timing may preserve deductions in some cases, though such options are not available to all taxpayers.
The interaction between phase-outs, the standard deduction, and itemized deductions, such as charitable contributions, adds complexity to the tax system. Tax professionals warn that overlapping rules can increase tax compliance costs, particularly for taxpayers relying solely on automated tax filing software.
All three deduction expansions are temporary. The tips and overtime deductions expire after the 2028 tax year, and the SALT deduction cap returns to $10,000 in 2030 unless Congress extends the provisions.
This uncertainty complicates long-term planning for households as they make decisions about housing, career changes, or retirement savings. Taxpayers must weigh current benefits against the possibility that future tax legislation could significantly alter the individual income tax landscape.
By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now
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