President Donald Trump released a new legislative proposal. His aim to lessen the tax burden on workers that earn tips and overtime wages is a laudable goal. This new bill offers above-the-line deductions for eligible workers, giving tax relief for millions of workers. Yet, the great deductions are subject to limitations and expiring dates.
Under this bill, any employee paid time-and-a-half for working more than 40 hours a week must be considered overtime workers. As of 2023, around 97.7 million workers are eligible for overtime. Despite the fact that this is a huge opportunity, only about 8% of hourly workers and 4% of salaried workers regularly cash in. This difference illustrates the small number of people who would benefit from the new deductions the bill allows.
For employers who fall under the law, the overtime pay deduction is limited to $25,000 per year for those eligible. This deduction especially affects low and moderate income workers who benefit from the extra pay they earn once they pass 40 hours and start making overtime. Importantly, if the overtime rate is 1.5 times the regular rate, you can deduct only the extra 50% from taxable income. This indicates that the base regular rate is off limits for deductions. That prevents employees from earning as much during overtime hours while limiting their tax relief.
Overtime wasn’t the only wage protection the bill expanded. Tip workers stand to gain. In 2023, just under 4 million people—about 2.5% of the U.S. labor force—worked in positions with tipping prevalent. For these workers, the annual deduction for tips is limited to $12,500 for single filers. For joint filers, the deduction is limited to $25,000. Once enacted, this deduction will apply to cash tips and tips received via credit or debit card payment. It covers all tips gained through tips-sharing agreements.
We believe the rule as proposed would do more to help the majority of households that depend on earned tip income. That benefit would reach nearly 60% of families with tipped workers, helping them have less tax burden. On average, these families would have saved about $1,800 per household annually. It should be noted that federal payroll taxes will continue to apply on any income earned through tipping. This would make many of the savings they hope to achieve less likely, thereby decreasing their potential savings.
Although the deductions will be available starting this year, they’re unfortunately temporary fixes that are slated to expire after 2028. Each of these deductions phase out for people making over $150,000 annually. For joint filers, the cut-off is even higher at $300,000 making it less available for households slightly above this level.