Overtime Deduction Explained- Tax update effective 2025-2028

If you work overtime, this could lower your 2025 tax bill (filed in 2026).

The IRS has clarified the new overtime tax deduction under IRC §225, allowing eligible workers to deduct qualified overtime compensation — with limits.

Highlights

• Up to $12,500 deduction (single)

• Up to $25,000 (married filing jointly)

• Phaseout begins at $150,000 MAGI (single) / $300,000 (joint)

Who Qualifies?

You must be a non-exempt employee under the FLSA. Exempt employees do not qualify. To qualify for the overtime tax deduction, you must be non-exempt under the Fair Labor Standards Act (FLSA)—the same rule that determines whether you’re legally entitled to overtime pay. You’re more likely to qualify if you’re paid hourly, receive overtime after 40 hours in a workweek, and your paycheck shows overtime at 1.5× or 2× your regular rate. You’re less likely to qualify if you’re salaried and classified as exempt or don’t receive overtime regardless of hours worked. The easiest way to confirm is to ask HR or employer: “Am I classified as a non-exempt employee under the FLSA?” If yes, you may qualify. 

Important for 2025

Employers are not required to separately report qualified overtime on Form W-2 for 2025. That means many taxpayers will need to calculate it themselves.

How It Works

Only the extra overtime premium is deductible — not the full overtime pay.

• Time-and-a-half → divide total overtime by 3

Example: $15,000 in overtime → $5,000 deductible.

New federal tax law now allows many tipped workers to deduct certain tip income from their federal taxable income, starting with the 2025 tax year (filed in 2026). This provision is part of the One Big, Beautiful Bill Act and is designed to give service workers more take-home pay.

What It Actually Is

The “No Tax on Tips” rule is not a complete exemption from all taxation — it creates an above-the-line deduction for qualified tip income up to $25,000 per year. This means you can subtract that amount from your federal taxable income, potentially reducing the tax you owe.

-You still report all tip income on your tax return.

-You still pay payroll taxes (Social Security and Medicare) on tips.

-State and local taxes still apply where applicable.

Income Limits & Phaseout

The deduction is capped at $25,000 per taxpayer per year, but it phases out as income rises:

-Begins phasing out at $150,000 MAGI for single filers

-$300,000 MAGI for married couples filing jointly

If your income is above those thresholds, the deductible amount gradually decreases.

How Long This Lasts

This deduction is temporary — it applies only for tax years 2025 through 2028. After 2028, the “No Tax on Tips” deduction is set to expire unless extended by Congress.

📌 Tip for Taxpayers: To maximize your deductions, be sure to report all of your tips to your employer.

New 2025 Tax Break: “No Tax on Car Loan Interest” Explained

Starting with the 2025 tax year (filed in 2026), a new federal tax deduction allows many taxpayers to deduct interest paid on a qualifying auto loan, even if they take the standard deduction.

How It Works

Eligible taxpayers may deduct up to $10,000 per year in interest paid on a new car loan used to purchase a qualifying vehicle for personal use. This is an above-the-line deduction, meaning you do not need to itemize to claim it.

Key Eligibility Rules

To qualify for this deduction:

-The auto loan must originate after December 31, 2024

-The vehicle must be new (original use begins with you)

-The vehicle must be used for personal purposes, not business or commercial use

-The loan must be secured by the vehicle (the lender holds a lien)

-The vehicle must be assembled in the United States

Qualifying vehicles may include cars, SUVs, minivans, pickup trucks, and motorcycles that meet the requirements.

Income Limits

The deduction is subject to an income phaseout:

-Begins at $100,000 MAGI for single filers

-Begins at $200,000 MAGI for married filing jointly

Higher-income taxpayers may see a reduced or eliminated deduction.

Time Limitation

This tax benefit is temporary and applies only to tax years 2025 through 2028, unless extended by Congress.

If you recently purchased a vehicle or are planning to buy one, this deduction could help reduce your taxable income. For your convenience, use the VIN Decoder link to learn where your vehicle was assembled. 

VIN Decoder 

Attention Seniors: New Tax Break for 2025!

Big news for taxpayers 65 and older — there’s a brand‑new tax deduction available for the 2025 tax year that could help lower your taxable income.

What’s the 2025 Senior Deduction?

Taxpayers age 65 or older can claim an additional senior tax deduction of up to $6,000, or up to $12,000 for qualifying married couples — on top of the regular standard deduction or itemized deductions.

Key Points You Should Know:

Available for taxpayers 65+ on or before the last day of the tax year.

You can claim it whether you itemize or take the standard deduction.

The deduction begins to phase out if your Modified Adjusted Gross Income (MAGI) exceeds certain limits:

• Single filers: Phaseout starts over ~$75,000 MAGI

• Joint filers: Phaseout starts over ~$150,000 MAGI

The deduction is temporary, effective for tax years 2025 through 2028.

Why This Matters:

This new deduction is designed to help older taxpayers reduce taxable income — potentially lowering tax owed or increasing refunds. It’s especially helpful for those with fixed retirement incomes like Social Security, pensions, or retirement distributions.

Arizona Minimum Wage Increase – What Business Owners Need to Know

Effective January 1, 2026, Arizona’s statewide minimum wage will increase to $15.15 per hour, up from $14.70. This annual increase is required by state law and is tied to inflation.

Tipped Employees:

The minimum cash wage for tipped employees will increase to $12.15 per hour, as long as tips bring total compensation up to at least the full minimum wage.

Key Reminders for Employers:

Review payroll systems and wage rates before year-end

Update labor budgets and cash flow projections for 2026

Ensure tip credit rules are applied correctly and documented

Local jurisdictions such as Flagstaff and Tucson have their own minimum wage rates that differ from the statewide rate. For example, Flagstaff’s minimum wage will increase to $18.35 per hour and will no longer provide a separate tipped wage rate, and Tucson’s minimum wage will increase to $15.45 per hour. Tucson's tipped employee rate is $12.45 an hour.

AZ Minimum Wage  

Flagstaff Minimum Wage 

Tucson Minimum Wage