Navigating the One Big Beautiful Bill Act (OBBBA): Key Tax Provisions for Clients

Written By: Gilles Hudelot, AFC®, CFP®

For financial counseling professionals, understanding the nuances of these provisions is crucial to effectively advise clients on maximizing their tax benefits. This article provides a comprehensive overview of two key deductions—the “No Tax on Tips” and “No Tax on Overtime”—along with other notable provisions of the bill.

The “No Tax on Tips” Provision 

This provision introduces a new “above-the-line” deduction for a broad range of workers who receive tips. It allows employees, gig workers, and self-employed individuals to deduct up to $25,000 in “qualified” tips from their income. This deduction reduces a taxpayer’s taxable earnings before standard or itemized deductions are calculated. 

A key aspect to highlight for clients is the definition of “qualified” tips: they must be voluntary cash or charged tips received from customers or through tip-sharing arrangements. This means mandatory gratuities for large parties or non-cash tips, such as gift cards or concert tickets, do not qualify for the deduction. 

Eligibility for this benefit is tied to occupations that have customarily and regularly received tips before 2025. The IRS is expected to publish an official list of these occupations by October 2, 2025. The deduction is available to both itemizing and non-itemizing taxpayers who have a Social Security number. However, it does not apply to self-employed individuals or employees of a “Specified Service Trade or Business” (SSTB), such as law or accounting firms, and is not available for those filing as Married Filing Separately. 

Financial professionals should note the income phase-out for this deduction. It gradually phases out for single filers with a modified adjusted gross income over $150,000 and for married couples filing jointly with an income over $300,000. 

Importantly, this deduction applies only to federal income taxes. Tips and wages remain subject to Social Security, Medicare, and any applicable state or local taxes. The provision is retroactive to the beginning of 2025 and is set to expire at the end of 2028 unless extended. 

The “No Tax on Overtime” Provision 

This new deduction is specifically for non-exempt W-2 hourly employees whose overtime meets federal labor standards, such as those working over 40 hours in a workweek and receiving at least 1.5 times their regular rate. The deduction applies exclusively to the “premium portion” of the overtime pay. For example, if a client earns $20 per hour and works 50 hours, only the extra $10 per hour for the 10 overtime hours, or $100 for the week, is deductible. 

Similar to the deduction for tips, this is an “above-the-line” deduction. It allows an hourly employee to deduct up to $12,500 of their qualifying overtime income if filing as single, or up to $25,000 if married and filing jointly. The deduction is not available for those filing Married Filing Separately, salaried exempt employees, independent contractors, or gig workers. It also phases out at the same income thresholds as the tip deduction: over $150,000 for single filers and $300,000 for joint filers. 

Like the deduction for tips, this benefit applies solely to federal income taxes. Overtime wages are still subject to Social Security, Medicare, and state/local taxes. The provision is retroactive to the beginning of 2025 and runs through the end of 2028. 

Client Action and Other OBBBA Provisions 

It’s important to advise clients that while their employer is responsible for tracking and reporting qualified overtime compensation and tips on forms like the W-2 or 1099, the responsibility to claim the deduction rests with the taxpayer when they file their Form 1040. 

Beyond these two provisions, the OBBBA also includes other deductions to consider: 

• No Tax on Car Loan Interest: A new deduction of up to $10,000 for interest paid on a loan for a new, personal-use vehicle assembled in the U.S. and purchased after December 31, 2024. 

• Deduction for Seniors: An additional deduction of $6,000 per individual for those aged 65 and older. 

In all cases, taxpayers must include their Social Security number on their return to claim the benefits. The IRS will provide transition relief for the 2025 tax year for taxpayers and employers subject to new reporting requirements. As with any new tax law, it is always a good practice to consult with a qualified tax professional to understand how these provisions apply to each client’s unique situation. 

Resources: https://www.irs.gov/newsroom/one-big-beautiful-bill-act-of-2025-provisions