No tax on tips and overtime (2025-2028): who qualifies in North Ohio

Checked against the sources linked at the end on 2 October 2026. Written by ProTaxService in Brunswick, OH, for taxpayers across North Ohio. General information, not tax advice for your situation.

TL;DR: For tax years 2025 through 2028, the federal return has new deductions for qualified tips (up to $25,000) and qualified overtime pay (up to $12,500, or $25,000 on a joint return). They lower your federal income tax, not your Social Security and Medicare tax. You claim them on Schedule 1-A, and the money is deducted after adjusted gross income. Ohio starts from your federal adjusted gross income, so these deductions are not expected to lower your Ohio tax, and your city tax is separate.

“No tax on tips” and “no tax on overtime” are slogans, and the law behind them is narrower than the slogans. The new federal deductions are real, but they come with caps, income limits, a list of eligible occupations and a rule that only the extra half of time-and-a-half counts. They also leave a lot untouched: payroll tax, Ohio income tax and city income tax.

This guide explains who qualifies, how big the deduction is, how to claim it for 2025 and 2026, and where it stops.

The tips deduction

Qualified tips are deductible up to $25,000 per return, with a phase-out starting at $150,000 of income. The deduction is reduced by $100 for each $1,000 your modified adjusted gross income (MAGI) is over $150,000 ($300,000 on a joint return). It applies to tax years 2025 through 2028 and does not apply after 2028.

Three conditions decide whether tips count:

  • The occupation must be on the Treasury list. Only tips received in an occupation that “customarily and regularly” received tips on or before December 31, 2024 qualify. The final regulations list more than 70 occupations in eight categories, and the list includes digital content creators. The IRS publishes it as the Treasury Tipped Occupation Codes.
  • The tip must be voluntary. The customer must pay it voluntarily, and it cannot be negotiated. Mandatory service charges and automatic gratuities are not tips.
  • Self-employed workers qualify, up to their net income. A gig worker or independent contractor in a listed occupation can claim it, but the deduction cannot exceed the net income from that business. The statute also excludes “specified service” businesses, and the IRS has not finished the rules for that exclusion, so transition relief continues.

The overtime deduction

Qualified overtime is deductible up to $12,500, or $25,000 on a joint return, and only the premium part counts. The same phase-out applies: $100 per $1,000 of MAGI above $150,000 ($300,000 joint).

The word “qualified” does the work. The deduction covers only the amount required by the Fair Labor Standards Act’s overtime rule, the extra half in time-and-a-half. For example, if your base rate is $20 an hour and you work 10 overtime hours at $30, you are paid $300 for those hours, and the premium that can qualify is the extra $10 an hour, or $100. The IRS’s own example uses double time, where the qualifying part is also only the premium.

Other limits:

  • Employees who are exempt from overtime rules, and employee-owners of 20% or more, generally get no deduction.
  • Self-employed people rarely qualify. The IRS says that “circumstances when qualified overtime compensation is properly reported on Form 1099-MISC or NEC are rare.”
  • Starting in 2026, an employee can deduct only the overtime shown in box 12 of the W-2, code TT. You cannot make up the difference with your own records. Our guide to the 2026 tax changes covers the other new amounts for 2026.

What the deductions do not change

Payroll tax still applies. The IRS says overtime pay is generally not excluded from wages for employment taxes, and employers still withhold income tax and the employee’s share of Social Security and Medicare on tips. Self-employed tips remain subject to self-employment tax. The deductions lower income tax only.

They are also deductions after adjusted gross income. That detail matters for Ohio and your city.

How to claim them

Claim tips and overtime on Schedule 1-A, and put the total on line 13b of Form 1040. Both itemizers and people who take the standard deduction can use it. A married couple must file jointly to claim it, and you need a valid Social Security number.

For tax year 2025, the W-2s and 1099s were not changed, and the IRS gave payors penalty relief. You use the records you have: W-2 box 7, Form 4137, a daily tip log or payroll statements. For 2026 and later, W-2s add box 12 codes for tips (TP) and overtime (TT), and the 1099-NEC adds boxes for tips, an occupation code and overtime.

Two other new deductions people ask about

The same law added other deductions on Schedule 1-A and elsewhere:

  • Senior deduction. $6,000 per person age 65 or older at year-end, for 2025 through 2028. It phases out at 6% of MAGI over $75,000 ($150,000 joint), and a joint return and Social Security numbers are required.
  • Car loan interest. Up to $10,000 a year, phasing out by $200 for each $1,000 of MAGI over $100,000 ($200,000 joint). The loan must be originated after December 31, 2024, for a new personal-use vehicle under 14,000 pounds that was assembled in the United States, secured by a first lien, with the vehicle identification number on the return. Leases do not qualify.

The cap on deducting state and local taxes also rose, to $40,000 for 2025 and $40,400 for 2026 under the statute, which helps itemizers who pay a lot of property and income tax.

What it means for your state and city tax

Ohio’s income tax return starts from your federal adjusted gross income, and these deductions come after that line. Ohio Department of Taxation (ODT) instructions say line 1 of the Ohio return must match your federal AGI. Ohio’s Senate Bill 9, signed March 5, 2026, conforms Ohio to the federal code for 2025. The Ohio Legislative Service Commission, the legislature’s research agency, says the tips and overtime deductions are “below-the-line” and “do not flow through to Ohio taxable income.”

We found no ODT statement on the senior or car-loan deductions. Because they also sit below AGI, plan as though they do not lower Ohio tax until ODT says otherwise. See our guide to Ohio income tax in 2026 for the state schedule.

City income tax is separate again. The Regional Income Tax Agency (RITA) says overtime and tips are not exempt from city income tax, so a restaurant server or an hourly worker in a RITA city such as Medina still owes city tax on those wages. See live in one city, work in another for how credits work when your job is in a different city.

Frequently asked questions

Does “no tax on tips” mean I keep my tips tax-free?

No. It is a federal income tax deduction up to $25,000. Social Security and Medicare tax, Ohio income tax and city income tax still apply.

Does all my overtime pay count?

No. Only the premium part required by federal overtime law counts, up to $12,500 ($25,000 joint), and only if your employer reports it correctly.

Can I claim it for 2025 now?

Yes, on a 2025 return you have not filed yet. The extended deadline was October 15, 2026, so file as soon as you can. Use the records you have, such as your W-2 box 7, Form 4137 or a daily tip log.

Do the deductions lower my state tax?

Probably not. The deductions come after federal AGI, and Ohio starts from AGI. The legislature’s research agency says they do not flow through to Ohio taxable income.

The short version

  • Tips: up to $25,000, listed occupations only, tips must be voluntary.
  • Overtime: up to $12,500 ($25,000 joint), premium part only, and the W-2 must show it from 2026.
  • Claim on Schedule 1-A, Form 1040 line 13b. Both deductions run 2025 through 2028.
  • Not affected: Social Security and Medicare tax, Ohio income tax and city tax.
  • 2026 returns: the W-2 shows tips in box 12, code TP, and overtime in code TT.

Rules, forms and IRS guidance are still changing, and your facts matter. Confirm with the IRS pages below, or bring your records to a preparer.

ProTaxService is a small practice in Brunswick, OH, run by Elena Rusakovich, an IRS-registered tax preparer (PTIN), working with individuals and small businesses across North Ohio. We prepare individual tax returns and can check whether these deductions apply to you. Tell us what you need or call (440) 212-9613.

Sources

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