Qualified Tips and Overtime Pay: New Above-the-Line Deductions for 2026
As we gear up for the 2026 tax season, one of the most impactful changes for working individuals comes from the introduction of Qualified Tip Income and Qualified Overtime Compensation deductions. These new provisions were enacted as part of the recently passed “One Big Beautiful Bill” and are designed to provide meaningful tax relief to employees who earn tips or overtime pay.
Understanding how these deductions work—and what documentation is required—will be critical for maximizing their benefit.
What Are the New Deductions?
Beginning in 2026, eligible taxpayers may claim:
- Up to $25,000 per individual in deductions for Qualified Tip Income
- Up to $12,500 in deductions per individual for Qualified Overtime Compensation
- Married filing jointly taxpayers may deduct up to $25,000 of Qualified Overtime Compensation
These deductions are considered above-the-line deductions, meaning they reduce adjusted gross income (AGI). Lower AGI can improve eligibility for other credits, deductions, and tax benefits.
Income Phase-Out Limits
The amount of Qualified Tip and Overtime deductions a taxpayer can claim is subject to income-based phase-outs:
- Single filers: Phase-out begins at $150,000 of modified AGI
- Married filing jointly: Phase-out begins at $300,000 of modified AGI
Modified AGI generally starts with AGI and removes certain exclusions, such as foreign earned income. For most taxpayers, modified AGI will be very close to regular AGI.
Reporting and Documentation Requirements
At this time, employers are only able to report tip income on the W-2 if it was reported to them during the year, however overtime compensation is not reflected on Form W-2. Because of this, tax professionals will need additional documentation to properly calculate the allowable deduction.
Most firms, including Thompson Tax Group, will require:
- A final year-end pay stub showing total tip income and overtime compensation earned during the year
While there are alternative methods to determine these amounts, the year-end pay stub remains the simplest and most reliable form of documentation.
The IRS has indicated plans to update Form W-2 in the future to reflect these income categories separately, but those changes are not yet in place for the 2026 filing season.
Reporting Tip Income Is Mandatory
It is important to note that tip income must be properly reported in order to qualify for this deduction. Unreported income does not qualify.
If tip income or overtime pay is not included in your reported wages, the deduction will not be allowed—even if you earned the income.
Planning Ahead for Tax Season
Taxpayers who earn tips or overtime should take proactive steps now:
- Retain all pay stubs throughout the year
- Ensure tip income is accurately reported to employers
- Review income levels to anticipate any phase-out limitations
These steps can help avoid delays, documentation issues, and missed tax savings.
Final Thoughts
The Qualified Tip and Qualified Overtime Compensation deductions represent a significant opportunity for tax relief in 2026. However, these benefits come with income limits and documentation requirements that should not be overlooked.
Working with a qualified tax professional can help ensure compliance while maximizing the deductions available under these new rules.