One Big Beautiful Bill Act: Tax Deductions for Workers
What Is the One Big Beautiful Bill Act?
The One Big Beautiful Bill Act (OBBBA), signed into law as Public Law 119-21 on July 4, 2025, is a comprehensive tax and spending bill. Among its provisions, it created three new above-the-line federal tax deductions for working Americans and seniors:
- No Tax on Overtime — deduction for qualified overtime compensation (IRC §225)
- No Tax on Tips — deduction for qualified tips (IRC §224)
- Senior Bonus — additional standard deduction for seniors age 65+
All three deductions are effective for tax years 2025 through 2028 and are claimed on Schedule 1 (no itemizing required).
1. No Tax on Overtime (IRC §225)
The overtime deduction allows eligible W-2 employees to deduct the overtime premium portion (0.5x their hourly rate) from their federal taxable income.
| Parameter | Single / HoH | MFJ |
|---|---|---|
| Maximum deduction | $12,500 | $25,000 |
| Phaseout starts | $150,000 MAGI | $300,000 MAGI |
| Fully phased out | $275,000 | $550,000 |
Key Requirements
- Must be covered by FLSA §7 overtime rules (salaried exempt not eligible)
- W-2 employment only — no 1099/self-employed
- Valid Social Security number required
- Married filing separately is not eligible
- Only the 0.5x premium is deductible, not the full 1.5x overtime rate
Source: IRS FAQ — Qualified Overtime Compensation
Read the full overtime guide → | Use the overtime calculator →
2. No Tax on Tips (IRC §224)
The tips deduction allows eligible tipped workers to deduct up to $25,000 in qualified tips per year from their federal taxable income.
| Parameter | Single / HoH | MFJ |
|---|---|---|
| Maximum deduction | $25,000 | $25,000 |
| Phaseout starts | $150,000 MAGI | $300,000 MAGI |
| Fully phased out | $400,000 | $550,000 |
Key Requirements
- Must work in an occupation customarily tipped as of December 31, 2024
- Tips must be reported on W-2
- Service charges and automatic gratuities do not qualify
- Married filing separately is not eligible
- Full tip amount is deductible (not just a portion like overtime)
Source: IRS — Tips and Overtime Guidance
3. Senior Bonus Deduction
The OBBBA also provides an additional standard deduction of $4,000 for taxpayers age 65 and older, on top of the existing elderly/blind additional deduction. This senior bonus is also effective for tax years 2025-2028.
Rules That Apply to All Three Deductions
- Above-the-line — claimed on Schedule 1, no itemizing required
- Federal income tax only — does not reduce FICA (Social Security + Medicare)
- Does not reduce state tax — most states have not conformed to the OBBBA deductions
- Effective 2025-2028 — sunsets after the 2028 tax year unless renewed by Congress
- MFS not eligible — married filing separately cannot claim any of the three deductions
- Phaseout mechanism — all deductions use the same $100-per-$1,000 (or fraction thereof) phaseout rate above income thresholds
2025 Standard Deductions (OBBBA)
The OBBBA also set new standard deduction amounts for 2025:
| Filing Status | Standard Deduction |
|---|---|
| Single | $15,750 |
| Married Filing Jointly | $31,500 |
| Head of Household | $23,625 |
Source: P.L. 119-21