Trump Law Shields Up to $25,000 in Tips From Federal Income Tax

President Donald Trump’s signature tax-and-spending package, enacted on July 4, makes federal income tax on most tips and overtime pay effectively zero for the next four tax years. Workers may deduct up to $25,000 in reported tips and $12,500 in overtime earnings from their 2025–2028 federal returns. The benefit phases out entirely for individuals with adjusted gross income above $150,000. Roughly four million Americans—about 2.5 % of the workforce—earned tips in 2023, according to Yale University’s Budget Lab. The Tax Policy Center estimates households that qualify will see an average tax cut of $1,800 a year. Because withholding rules do not change, employees will realize the savings only when they file 2025 tax returns in early 2026. Labor advocates say the capped, temporary deduction offers limited relief to low-wage servers and other service staff whose incomes are often already below federal tax thresholds, while potentially enlarging reliance on gratuities. Critics also note the legislation pairs the tip and overtime break with extensions of the 2017 tax cuts, higher defense and border spending, and reductions in Medicaid and food-assistance funding, measures that the Congressional Budget Office projects will add about $3.3 trillion to the national debt. The federal change does not alter state income-tax rules; states such as Wisconsin still tax tips unless they enact separate exemptions. Congressional supporters say they will seek to make the federal deductions permanent before they expire in 2028.