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OBBB Tax Exclusions: Overtime, Tips, and the New Senior Deduction

P.L. 119-21 creates Schedule 1-A deductions for tip income (up to $25,000), overtime premium pay, and a $6,000 senior deduction — but none remove income from gross entirely, and all three sunset after 2028.

Tax guide~10 min readWritten by Last reviewed November 2026

Bottom line up front: The One Big Beautiful Bill (P.L. 119-21) creates new Schedule 1-A deductions for tip income (up to $25,000), overtime premium pay, and a $6,000 senior deduction — but none of these remove the income from gross income entirely, and all three sunset after 2028 unless Congress acts. Use the OBBB tax impact calculator to estimate what any combination of these provisions saves you specifically.

What the One Big Beautiful Bill Changed

President Trump signed the One Big Beautiful Bill (P.L. 119-21) into law in 2025. It is a sweeping reconciliation package that touches individual income taxes, border security, and several other areas of domestic policy. For individual taxpayers, the most widely publicized provisions are three new deductions:

  1. A deduction for tips received in customarily-tipped occupations (§70201)
  2. A deduction for the premium portion of overtime pay (§70202)
  3. A new $6,000 “senior deduction” for taxpayers age 65 and older

These are deductions, not exclusions from gross income. That distinction matters. Your W-2 still shows full income. You then reduce taxable income on your Form 1040, exactly as the standard deduction does. The result is that the tax savings equal the deduction amount multiplied by your marginal rate — not a dollar-for-dollar credit against the tax bill.

The law also temporarily allows a deduction for interest on auto loans for U.S.-manufactured vehicles, discussed briefly below.

Sunset: All three individual provisions expire after tax year 2028 unless Congress extends them (P.L. 119-21 §§70103, 70201-70202, per statutory sunset language).

The Overtime Exclusion — Premium Portion Only, Cap, Phase-Out

The overtime deduction applies only to the premium portionof overtime pay — the extra half-time on top of the regular rate. Under FLSA (29 U.S.C. §207), employees covered by overtime rules earn at least 1.5x their regular rate for hours beyond 40 per week. The “premium” is the 0.5x above the regular rate.

Example: A warehouse worker earns $20/hr. For 10 overtime hours, total overtime pay is $300 (10 × $30). The regular-rate equivalent of those 10 hours is $200. The deductible premium is $100 — the 0.5x addition.
Cap: The deduction is capped at $12,500 per year ($25,000 for married couples filing jointly) under P.L. 119-21 §70202. IRS Notice 2025-69 provides implementation guidance on how employers should report the deductible premium on W-2s and how employees claim it.
Phase-out: The deduction phases out above $150,000 MAGI (single) / $300,000 MAGI (MFJ). Above those thresholds it reduces ratably and eventually reaches zero.
FICA still applies: Overtime pay — premium portion included — remains subject to Social Security and Medicare taxes under IRC §3101. There is no FICA exemption in P.L. 119-21.
Common error to avoid:Saying “overtime is now tax-free.” It is not. It is deductible, which reduces taxable income, which reduces the income tax calculated against the bracket schedule. A 22%-bracket taxpayer saves roughly $0.22 per dollar deducted. That is materially different from “tax-free.”

The Tip Exclusion — IRS-Designated Occupations, $25k Cap, Phase-Out

The tip deduction under P.L. 119-21 §70201 allows workers in IRS-designated customarily-tipped occupations to deduct tip income from federal taxable income, up to $25,000 per year.

Qualifying occupations: The IRS published a list of qualifying occupations in the Treasury/IRS final regulations (IR-2026-49, April 10, 2026), which organize more than 70 occupations by Treasury Tipped Occupation Code into eight categories (beverage and food service; entertainment and events; hospitality and guest services; home services; personal services; personal appearance and wellness; recreation and instruction; and transportation and delivery). Broadly, these are customer-facing service roles in food service, hospitality, and similar industries where tipping is a longstanding custom. If your occupation is not on the list, the deduction does not apply — even if you do receive tips.
Cap: $25,000 per year. Tips above $25,000 are taxable as normal.
Phase-out: The deduction phases out above $150,000 MAGI (single) / $300,000 MAGI (MFJ) per P.L. 119-21 §70201. At those income levels, the deduction declines and eventually disappears entirely.
FICA still applies: Tips remain subject to FICA under IRC §3101. Employers and employees owe Social Security and Medicare tax on all tip income, including the deductible portion. The deduction is an income tax benefit only.
Reporting: Employers are still required to include tips on W-2 Box 1 (wages) and Box 7 (social security tips). The deduction is claimed on Form 1040, not as a W-2 exclusion.

Use the no-tax-on-tips calculator or the no-tax-on-overtime calculator for per-provision estimates.

The Senior Deduction — $6,000 Per Eligible 65+, Phase-Out

Taxpayers who are age 65 or older by December 31 of the tax year may deduct an additional $6,000 per qualifying person above and beyond the standard deduction. A married couple where both spouses are 65 or older may deduct $12,000 total.

This is separate from the existing additional standard deduction for seniors under IRC §63(f), which adds $2,050 per qualifying person (blind or 65+) for unmarried filers ($1,650 per spouse for married filers). The OBBB senior deduction stacks on top of both the standard deduction and the IRC §63(f) addition.

Phase-out: The senior deduction phases out at 6% of MAGI above $75,000 (single) / $150,000 (MFJ). For a single filer with $100,000 MAGI:

  • Excess above threshold: $100,000 − $75,000 = $25,000
  • Phase-out reduction: 6% × $25,000 = $1,500
  • Remaining senior deduction: $6,000 − $1,500 = $4,500

Interaction with standard deduction: A 65+ filer taking the standard deduction in 2026 could have: $16,100 (standard) + $2,050 (IRC §63(f) addition) + $6,000 (OBBB senior) = $24,150 in total deductions before any itemized consideration. That is meaningful.

Auto-Loan-Interest Deduction

P.L. 119-21 also adds a temporary Schedule 1-A deduction for interest paid on loans used to purchase U.S.-manufactured vehicles. The deduction applies to vehicles assembled in the United States by domestic manufacturers. Income caps and vehicle price caps apply per the statute. This deduction is narrower than it sounds — it does not cover all auto loans — and is also subject to the 2028 sunset. This article does not cover it in depth; consult IRS guidance when it is finalized.

Three Example Scenarios

The following table compares estimated 2026 federal income tax (before credits) for three taxpayer profiles under prior law versus OBBB law. Federal income tax only; FICA and state taxes excluded.

Assumptions: Standard deduction used. Single filers except retired couple (MFJ). 2026 tax brackets per Rev. Proc. 2025-32. Tip/OT deductions modeled per §70201-70202.

Estimated 2026 federal income tax: old law vs OBBB law. Source: P.L. 119-21, Rev. Proc. 2025-32.
ProfileGross IncomeOBBB DeductionTax (Old Law)Tax (OBBB)Saving
Server ($52k wages + $18k tips)$70,000$18,000 tip deduction~$6,570~$4,060~$2,510
Warehouse worker ($48k wages + $8k OT premium)$56,000$8,000 OT premium deduction~$4,540~$3,580~$960
Retired couple 65+, both (SS + pension)$90,000$12,000 senior deduction (2 × $6k)~$6,128~$2,714~$3,414

Tax calculations use 2026 brackets per Rev. Proc. 2025-32. Old-law baseline uses standard deduction only, no OBBB provisions.

Common Misconceptions

“Overtime is now tax-free.” Wrong. Overtime pay is still included in gross income. The premium portion (not the full overtime pay, just the 0.5x add-on) is deductible from federal taxable income. FICA applies in full. State income tax may still apply depending on whether your state conforms to this federal deduction. The after-tax benefit is the deduction multiplied by your federal marginal rate.

“All tipped workers qualify.” Not correct. The deduction requires the worker to be in an IRS-designated customarily-tipped occupation per the Treasury/IRS final regulations (IR-2026-49, April 10, 2026). Workers in occupations not on the IRS list — even if they receive tips — are not eligible.

“The OBBB senior deduction replaces the existing senior standard deduction addition.” It does not. The $6,000 OBBB senior deduction stacks on top of the existing IRC §63(f) addition ($2,050 for a single filer; $1,650 per spouse for married filers). They are different provisions with different rules.

“These provisions are permanent.” All three sunset after 2028 (P.L. 119-21 §§70201-70202). Planning beyond that requires assumptions about Congressional action.

“The tip deduction removes tips from FICA.” It does not. FICA under IRC §3101 applies to all tip income regardless of the income tax deduction status.

When Does This Expire?

P.L. 119-21 sets expiration dates at the end of tax year 2028 for the tip deduction, overtime deduction, and senior deduction. If Congress does not act before then, these provisions disappear and prior law — no special treatment for these income types — would govern starting in tax year 2029.

Historically, Congress has sometimes extended popular temporary tax provisions (“tax extenders”), but has also allowed others to lapse. There is no reliable way to predict what will happen. For financial planning purposes, do not assume the 2028 sunset will be extended unless legislation is enacted.

Frequently Asked Questions

Does the tip deduction apply if I work in delivery or rideshare and receive tips?
Whether delivery or rideshare qualifies depends on whether those occupations appear on the IRS-designated list in the Treasury/IRS final regulations (IR-2026-49, April 10, 2026). The IRS defined qualifying occupations as those where tipping is a longstanding custom in food service, hospitality, and similar sectors. Gig economy tips in delivery/rideshare occupy uncertain territory — check the actual IRS list before assuming eligibility.
My employer pays time-and-a-half for all overtime — how do I calculate the deductible premium portion?
The premium is 0.5x your regular rate per hour. If you earn $20/hr and worked 10 overtime hours, your OT pay is $300 (10 × $30). The deductible premium is $100 (10 × $10). Your employer should report the deductible premium on your W-2 per IRS Notice 2025-69 guidance, but you can also compute it yourself using pay stubs.
I'm 66 and take the standard deduction. Can I also take the $6,000 OBBB senior deduction?
Yes. The OBBB senior deduction stacks on top of the standard deduction and on top of the existing IRC §63(f) additional standard deduction for seniors. All three can apply simultaneously, subject to the phase-out rules. A single filer at 66 with $70,000 MAGI — below the $75,000 phase-out threshold — can claim all three without reduction.
Do I need to itemize to claim the overtime or tip deductions?
No. These are Schedule 1-A deductions. You take them whether you use the standard deduction or itemize. This is one of the more valuable features of these provisions — they are not limited to itemizers.
My MAGI is $160,000 (single). Does the tip phase-out eliminate my deduction entirely?
At $160,000 MAGI, you are $10,000 above the $150,000 threshold. The phase-out reduces the deduction, but the exact phase-out rate determines how much remains. Under the statutory formula in P.L. 119-21 §70201, the $10,000 excess triggers a partial reduction — the deduction does not hit zero until MAGI climbs substantially above $150,000. Use the OBBB tax impact calculator for precision.

Estimate Your Specific Impact with the OBBB Tax Impact Calculator

The examples in this article are illustrative and use simplified bracket math. Your actual benefit depends on your filing status, MAGI, tip income amount, OT premium amount, and whether your occupation qualifies. The OBBB tax impact calculator handles all of these inputs simultaneously and shows the marginal federal tax saving for each provision.

Open the calculator →

Written by

Wanyu T

Last reviewed: May 2026 · Sources: P.L. 119-21 §§70201-70202, IRS Notice 2025-69, Treasury/IRS final regulations IR-2026-49 (Apr. 10, 2026), Rev. Proc. 2025-32, IRC §3101, FLSA 29 U.S.C. §207.

Estimates only — not professional tax advice. Consult a licensed CPA for your specific situation.

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