| QUALIFIED TIPS: what to know |
| New tax law allows a deduction for qualified tips – up to $25,000 per return (not person!). A tip is a qualified tip if:It is paid in cash or cash equivalent.From a deduction-eligible occupation, as listed in proposed Treasury RegulationsIt is voluntarily paid by the customer and not subject to negotiation. What does not qualify? Service charges, like those typically added to large groups, do not qualify for the deduction, as they are not voluntary or negotiable. Tips earned for any illegal activity – for example, if you earn tips in a business that requires a license (like a liquor license, or cosmetology license) and you do not have that license, you cannot deduct your tips. Tips received from a kiosk that does not allow a customer to modify or decline (for example, there is a button for 15, 18, 20%), only tips received above minimum option qualify. If you have a business, you may want to check your sales terminal for this! You cannot receive the deduction if you file a married filing separate return and there is an income phaseout over $150,000 ($300,000 MFJ). There is no requirement in 2025 for employers to report tips separately. Reporting requirements begin in 2026. Tips in an “allocated tips” box on a W-2 may be used. Otherwise, you will need to provide pay stubs or some other documentation of tips received. Self-employed taxpayers need to keep a separate log of tips received, and tips should be reasonable (i.e., don’t submit $40,000 in income and claim that $25,000 of it is tips…) |
| The Overtime Deduction: How does it work? |
| Taxpayers may be able to deduct up to $12,500 ($25,000 MFJ) of the overtime premium earned beginning in 2025. The overtime premium is the “half” in the “time and a half” payment. So, if you earn $20/hr, and your overtime pay is $30/hr, you may be able to deduct the $10 overtime premium. To qualify, the overtime must be required under the Fair Labor Standards Act. You cannot receive the deduction if you file a Married Filing Separate return. Deduction is phased out over $150,000 of income ($300,000 MFJ). Overtime is not required to be reported on a W-2 for 2025. Some employers will provide the information. If yours does not, you will need to provide pay stubs to figure the deduction. |