The One Big Beautiful Bill Act (OBBBA) introduces game-changing deductions that will impact millions of your clients. As you prepare for the 2025 filing season, these five provisions require immediate attention.
1. Tips Deduction: Up to $25,000, But Watch the Details
Employees can now deduct qualified tips up to $25,000 annually, but not all tips qualify. Mandatory service charges don't count, and tips received from specified service trade or businesses (SSTBs) are excluded, even for non-owner employees.
The 2025 Problem: No W-2 reporting exists for 2025 returns. You'll need to question clients directly about their tip structure and employer type. AGI phaseouts start at $150,000 (single) or $300,000 (married filing jointly), reducing the deduction by $100 for every $1,000 over the threshold.
2. Overtime Deduction: Only FLSA-Qualifying Overtime Counts
The deduction allows up to $12,500 (single) or $25,000 (married filing jointly) for qualifying overtime. Here's the catch: only overtime paid under Section 7 of the Fair Labor Standards Act qualifies, time-and-a-half for hourly employees working over 40 hours per week.
What Doesn't Qualify:
- State-mandated overtime
- Collective bargaining agreement overtime
- Salaried employee overtime
- Company policy overtime
Without 2025 W-2 reporting, you'll need detailed documentation from clients about how their overtime is calculated.
3. Senior Exemption: $6,000 Deduction for Age 65+
Here's the easy win: taxpayers age 65 and older get an additional $6,000 exemption deduction ($12,000 if both spouses qualify). This temporary provision runs from 2025-2028.
Phaseout calculation: Lose 6% of the deduction for every dollar of AGI above $75,000 (single) or $150,000 (married filing jointly). Available to both itemizers and non-itemizers.
4. W-2 Reporting Changes Coming in 2026
While 2025 W-2s won't show qualifying tips and overtime separately, the IRS has released draft forms with new Box 12 codes for 2026 reporting. This means:
For your business clients: Payroll systems need updates now to track qualifying tips and FLSA overtime separately.
For your individual clients: Create documentation systems for 2025 returns since standardized reporting doesn't exist yet. Consider developing a client questionnaire specifically for tips and overtime income.
5. Enhanced Dependent Care Benefits in 2026
Starting in 2026, the dependent care flexible benefit limit jumps from $5,000 to $7,500. The Form 2441 credit is also enhanced, with maximum credit percentages increasing from 35% to 50% for lower-income taxpayers.
Planning opportunity: Analyze whether clients benefit more from the flexible benefit plan or the credit. This proactive planning conversation sets you apart as a trusted advisor.
Your Action Plan
These temporary provisions (2025-2028) create a narrow window for clients to maximize benefits. The biggest challenge? Lack of standardized reporting for 2025 returns means you need systems in place now.
Master These Changes with Expert Training
Our course "2025 OBBBA: Compensation, Payroll & Employment Provisions" with Jason Dinesen, EA, provides the practical strategies you need to confidently handle these complex provisions. Learn how to gather information for 2025 returns, understand new W-2 reporting, and maximize client tax savings.
This course counts for 2 Hours of Federal Tax Law for IRS Continuing Education.
Learn more here to ensure you're prepared for the challenges ahead.
Sources
- Internal Revenue Service. "One, Big, Beautiful Bill Act: Tax deductions for working Americans and seniors." IRS.gov.
- Jackson Lewis P.C. "OBBBA's Tips + Overtime Tax Break: Reclassification Considerations, Reporting Requirements, Industry Impact + More." July 25, 2025.
- DHJJ. "How to Deduct Overtime Pay and Tips from Taxes (New 2025 Bill Explained)." August 4, 2025.
- Fisher Phillips LLP. "Important New Reporting Rules for Overtime Pay and Tipped Income." July 29, 2025.
- Internal Revenue Service. "Annual Filing Season Program." IRS.gov.
