A pair of new federal deductions is aimed at people who earn tips or work overtime, and they can add up to real money for older Americans still on the job. Under last year’s tax law, qualifying workers can now write off a slice of their tip and overtime income directly, without itemizing, on a brand-new tax form. The breaks are temporary, running through the 2028 tax year.
For a semi-retired restaurant server, a hospital nurse picking up extra shifts, or a delivery driver logging holiday overtime, the deductions can shave hundreds off a federal tax bill. They are not automatic, though, and claiming them means knowing which form to use and where the income limits kick in.
What the tips and overtime deductions actually cover
The two deductions come out of the One, Big, Beautiful Bill and apply to tax years 2025 through 2028. According to the IRS fact sheet on the new deductions, workers in tipped occupations can deduct up to $25,000 in qualified tips, and workers with qualified overtime can deduct up to $12,500 (or $25,000 for a married couple filing jointly). Both are above-the-line deductions, which means a worker can claim them whether or not they itemize.
There is an income ceiling. Each deduction begins to phase out once modified adjusted gross income tops $150,000 for an individual, or $300,000 for joint filers. Above those points, the benefit shrinks. For most older workers earning tip or overtime income on a modest wage, though, the full deduction is likely within reach.
It is also worth understanding what the deductions do not do. They lower federal income tax, but they do not reduce the Social Security and Medicare payroll taxes withheld from a paycheck, which still apply to tips and overtime as they always have. A worker who sees the deduction as a reason to expect a dramatically smaller tax bill may be disappointed if most of what comes out of each check is payroll tax rather than income tax. The benefit is real, but it is targeted at one specific part of the tax owed.
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The new Schedule 1-A is where the deductions live
Both write-offs are claimed on a new form. The IRS created Schedule 1-A, Additional Deductions, to consolidate the four new deductions enacted under the law, including the tips and overtime breaks, in one place. A worker who never filed anything beyond a basic return will need to attach this schedule to capture the benefit, and skipping it means leaving the deduction unclaimed.
For older filers who have their taxes prepared, that is a point worth raising directly with a preparer, since the form is new for the 2025 filing season and easy to overlook. The IRS has also warned about scam “calculators” and preparers promising oversized refunds tied to the new law, so a healthy skepticism toward anyone guaranteeing a specific windfall is warranted.
Recordkeeping is the other half of the job. Qualified tips generally need to be reported and substantiated, and overtime that qualifies is the premium portion of pay above a worker’s regular rate rather than the entire overtime paycheck. Keeping pay stubs and any employer statements that break out tips and overtime makes it far easier to claim the correct amount, and it provides a paper trail if the return is ever questioned. Workers whose employers report these figures on year-end tax documents will have an easier time than those piecing the numbers together on their own.
Why this matters for near-retirement and working retirees
Many Americans in their 60s keep working part-time or in service jobs where tips and overtime make up a meaningful share of pay, whether to bridge the years before claiming Social Security or to supplement a fixed pension. For those workers, a deduction that lowers taxable income can also have knock-on effects, since the figure that flows through to the return influences everything from the tax bracket to how much of a Social Security benefit is taxable in years the worker is already collecting.
There is also a coordination point for anyone already collecting benefits. Because the deductions reduce taxable income but not the underlying wages, they generally do not change how earnings count against Social Security’s annual earnings limit for those who claim before full retirement age. A working retiree should treat the break as a tax benefit rather than a way to shelter earnings from that separate test, and confirm with a preparer how the two interact in a specific situation.
The deductions are set to expire after 2028 unless Congress extends them, which makes the window a defined one rather than a permanent feature of the tax code. An older worker weighing whether to pick up extra shifts now has a clearer reason to keep good records of tip and overtime income, because that documentation is what turns the deduction from a headline into an actual reduction on the return. The core details to hold onto are the dollar caps, the $150,000 income threshold where the benefit starts to fade, and the requirement to file Schedule 1-A to claim either one.
This article was researched and drafted with the assistance of AI and reviewed by The Financial Wire editorial team.
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David M. Keller is a finance writer based in Columbus, Ohio, covering personal finance and consumer-focused economic topics. He earned his degree in journalism from Ohio University and began his career reporting on local business and economic trends for a regional media outlet. Since then, he has contributed to a variety of online publications, focusing on clear, practical coverage of topics such as cost of living, debt, and everyday financial decision-making.
