New Rule Could Boost Refunds for Workers

One of the signature provisions in the recently passed tax bill is the so-called “no tax on tips and overtime.” While there are some limitations, this change could deliver meaningful benefits for workers who earn much of their income from tips or overtime pay.

An intriguing aspect of the change is that it applies retroactively for tax year 2025. Qualified workers paid through tips and overtime have likely seen no changes in their paychecks this year. Instead, they will see the benefit of the change as a tax refund in 2026 if they qualify. This will act as a sort of stimulus for these workers next year.

Tipped workers could end up getting an extra $1,000 to $2,000 in refunded tax, while overtime workers could see similar benefits depending on how many overtime hours they worked and at what wage.

How much could you expect?

The new rules will be implemented through above-the-line deductions. These deductions are subtracted from your total gross income to arrive at adjusted gross income. This effectively means that you will get to subtract income on which you would otherwise be taxed. You won’t need to itemize deductions to qualify.

For both tipped and overtime workers, the maximum deduction is $12,500 (or $25,000 for workers who are married filing jointly). Certain exclusions apply, and we are still awaiting final guidance from the IRS on some of the exclusions.

For example, a bartender earning $60,000 this year—of which $20,000 comes from tips—could deduct up to $12,500 from gross income. That would lower the bartender’s adjusted gross income to $47,500 (ignoring any other potential deductions such as contributions to qualified retirement plans). This could mean a reduction in federal taxes of about $1,562 in the 12% federal tax bracket. Because no extra withholding has occurred, that reduction would likely appear as a larger refund in 2026.

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For overtime workers, the deduction applies to the “extra” half above your base rate. If your base rate was $30 per hour and overtime was paid at $45 per hour, the deduction would apply to the $15 extra income earned during those overtime hours. If you worked 400 overtime hours, that would equal $6,000 in overtime income that could be deducted. Again, assuming a 12% tax bracket, that would amount to a tax refund of $720.

Taxpayers in higher tax brackets will see larger potential reductions.

Qualifications and nuances

Before you get too excited, check to make sure you qualify. For tipped workers, the IRS recently released a list of 70 occupations that qualify—those that “customarily and regularly received tips.” The list includes bartenders, food servers, concierges, housekeepers, massage therapists, hairdressers, and most occupations you can think of who would receive tips.

The overtime deduction applies to most hourly and “non-exempt” workers covered under the Fair Labor Standards Act. Salaried or “exempt” employees typically won’t qualify.

Note that these tax changes are not permanent. They are scheduled to exist in tax years 2025 through 2028 and expire thereafter. Also note that the IRS may adjust withholding rules in 2026, meaning future benefits could show up as slightly higher paychecks rather than larger refunds.

Keep in mind that tips and overtime pay are still subject to Social Security, Medicare, and state or local income taxes. And the deduction phases out for single filers earning above $150,000 or married filers above $300,000.

The bottom line

The “no tax on tips and overtime” rule could provide a meaningful financial boost for many hourly workers, even if the benefits won’t be felt until next year’s tax refunds. It has received little attention this year, probably because tax withholding did not change. Once the refunds hit in early 2026, more workers will likely take notice of this under-the-radar tax change.