When Congress passed the One Big Beautiful Bill Act this summer, much of the attention focused on business tax breaks and equipment deductions. But buried within those 887 pages are some significant new benefits specifically designed to help many working families keep more of their hard-earned money. If you’re a server, delivery driver, factory worker pulling overtime shifts, or just a parent trying to make ends meet, this legislation could put real money back in your pocket.
At JCT Tax Solutions, we’re working to understand how these new provisions will actually work in practice, because the details matter when it comes to maximizing your benefits. The IRS has issued initial guidance clarifying some key questions, but they’re still developing the final rules and tax forms we’ll use for 2025 returns. While the headlines promised “no tax on tips” and “no tax on overtime,” the reality is more nuanced—and frankly, more interesting from a planning perspective.
Here’s what working families need to know about these changes, and more importantly, how to make sure you’re positioned to take full advantage of them when you file your 2025 tax return next year.
The Child Tax Credit Gets a Permanent Boost
Let’s start with some unqualified good news that affects millions of families: the Child Tax Credit just got a permanent increase. We’re talking about going from $2,000 to $2,200 per qualifying child, and unlike some of the other provisions we’ll discuss, this one isn’t temporary. It’s here to stay.
Now, $200 per child might not sound like life-changing money, but consider this: a family with three kids just saw their annual Child Tax Credit increase from $6,000 to $6,600. That’s an extra $600 every year, permanently. For families in the refundable range—meaning you get money back even if you don’t owe federal income tax—this could mean meaningfully larger refunds year after year.
The qualification rules haven’t changed much. Your child needs to be under 17 at the end of the tax year, and both you and your child need valid Social Security numbers. The phase-out still begins at $200,000 for single filers and $400,000 for married couples filing jointly. What’s different is that this change is written as permanent law, which provides much more planning certainty than temporary provisions, even though Congress could always revisit it in future legislation.
Understanding the “No Tax on Tips” Reality
This is where things get interesting, and where the headlines don’t tell the whole story. Yes, there’s a new deduction for tips, and yes, it can save you real money. But calling it “no tax on tips” is misleading in ways that matter for your actual paycheck.
The tips deduction allows you to deduct up to $25,000 in qualified tips from your taxable income. Notice I said deduction, not credit. This reduces the income you pay federal income tax on, but you’re still paying Social Security and Medicare taxes on every dollar of tip income. For most workers, that’s 7.65% right off the top that this provision doesn’t touch.
Important note: You won’t see any difference in your paychecks during the year. Your employer will continue to withhold federal income tax on your full tip income just like always. The benefit comes when you file your tax return and claim the deduction—that’s when you should see a refund of some of those withheld taxes.
Here’s what makes a tip “qualified” under the new law: it has to be voluntary, it can’t be subject to negotiation, and it has to come from an occupation where tipping was customary as of December 31, 2024. The IRS will publish an official list of qualifying occupations by October 2, 2025, but they’ve indicated they’ll provide transition relief for 2025 to help both taxpayers and employers adjust to the new requirements. Your employer will need to separately report tip income and identify your occupation on tax forms, which may require some coordination with payroll departments.
But there’s a catch that affects a lot of gig workers, which the IRS has now confirmed. If you’re self-employed—think independent contractor delivery drivers—your tips deduction can’t exceed your net business income. Additionally, if you work in what the tax code calls a “specified service trade or business” (like consulting or financial services), you won’t qualify for this deduction at all, whether you’re an employee or self-employed.
The income limits matter too. Once your adjusted gross income hits $150,000 as a single filer, or $300,000 as a married couple, the deduction starts disappearing. You lose $100 of deduction for every $1,000 over those thresholds. And here’s something that trips people up: if you’re married, you generally have to file jointly to get this benefit at all.
The Overtime Deduction: When Extra Hours Really Pay
The overtime provision works similarly to the tips deduction, but with its own set of complexities. You can deduct up to $12,500 as a single filer or $25,000 as a married couple filing jointly, but only for overtime that’s actually required under federal labor law—generally that time-and-a-half pay for hours over 40 in a week.
Just like with tips, don’t expect to see any difference in your overtime paychecks during the year. Your employer will withhold federal income tax on your full overtime pay as usual. The tax benefit shows up when you file your return and claim the deduction.
The IRS has now clarified what you actually get to deduct: it’s the premium portion only—the amount that exceeds your regular rate. So if you normally make $20 an hour and get $30 for overtime, the deductible amount is $10 (the extra “half” in time-and-a-half), not the full $30. This makes the benefit more modest than some initial interpretations suggested, but it’s still meaningful money for workers who regularly put in overtime hours.
There’s still some uncertainty for workers whose employers are more generous than federal law requires. If your company pays double-time for holidays or offers more than time-and-a-half for overtime, it’s not yet clear whether the entire premium qualifies or just the portion that federal law mandates. We’ll likely need additional IRS guidance on these situations.
What we do know from the IRS guidance is that your employer has to separately report your overtime compensation on your W-2 for you to claim this deduction. The IRS will provide transition relief for 2025 to help employers adjust to this new reporting requirement, but it’s still going to require cooperation from payroll departments across the country. If your company can’t or doesn’t separate out overtime pay on your W-2, you might miss this benefit entirely, even if you worked qualifying overtime all year.
The income limits are the same as the tips deduction—$150,000 for singles, $300,000 for married couples—with the same phase-out structure. And like the tips benefit, this one disappears after 2028, so it’s a four-year window to take advantage.
Real Families, Real Savings
Let me walk you through how this actually works for different types of families, because the math makes the benefits much clearer.
Take Maria and Juan, a married couple in Minnesota. Maria works as a server at a local restaurant and earned $18,000 in tips last year that were properly reported on her W-2. Juan works at a manufacturing plant with steady hours. Their combined adjusted gross income is $75,000, well under the phase-out threshold. Maria can deduct the full $18,000 in tips, which at their 22% tax bracket saves them about $3,960 in federal income taxes. If they have two young children, they’re also getting an extra $400 from the enhanced Child Tax Credit. That’s over $4,300 in additional take-home money compared to the old law.
Now consider Sarah, a single factory worker who regularly picks up overtime shifts. She earned $4,000 in overtime premium pay (the “half” portion of her time-and-a-half compensation) last year, but her total income puts her at $165,000, which means she’s over the phase-out threshold. Her overtime deduction gets reduced to $2,500, but that still saves her about $600 in federal taxes at the 24% bracket.
Then there’s Mike and his wife—Mike drives for a delivery service as an independent contractor while his wife works factory overtime. Mike’s delivery business shows a $12,000 profit after expenses, and he received $15,000 in app-reported tips. His tips deduction is limited to his $12,000 business profit. His wife earned $3,000 in qualifying overtime premium pay. At their combined 22% tax rate, they’re saving about $3,300 between the two deductions.
What You Need to Start Tracking Now
If you want to maximize these benefits for your 2025 tax return, there are some things you should start documenting immediately. For tip earners, keep records of all tip income, even amounts under normal reporting thresholds. Make sure you understand which of your tips actually qualify—it has to be voluntary customer tips, not mandatory service charges or fees. If you’re self-employed, track your business expenses carefully since they limit your tips deduction.
For overtime workers, the key requirement is that your employer separately report overtime premium pay on your W-2. The IRS has confirmed this reporting requirement and will provide transition relief for 2025. Many employers already track overtime separately for payroll purposes, so this may not require major changes to existing systems. Keep your own records of overtime hours and the premium amounts you receive—this helps ensure accuracy and gives you backup documentation if needed.
For everyone, pay attention to your adjusted gross income as the year progresses. Both benefits phase out at relatively modest income levels, so you might want to consider strategies like increasing your 401(k) contributions or maximizing Health Savings Account deposits to keep your AGI under the thresholds.
The State Tax Wild Card
Here’s something that could significantly affect your actual tax savings, but that we won’t know for sure until early next year: how states handle these new federal deductions. Some states automatically conform to federal tax changes, while others require legislative action. Still others might specifically reject these deductions, requiring you to add them back on your state return.
In Minnesota, where we practice, the state typically follows federal tax law changes, but the legislature will need to decide whether to adopt these specific provisions. If Minnesota doesn’t conform, you’d get the federal benefit but miss out on state tax savings, and your tax return preparation could become more complicated with different rules for federal and state calculations. If they do conform, your total tax savings could be significantly higher.
This uncertainty makes it important to plan conservatively and not count on state tax benefits until we know for sure how each state will respond.
Planning Beyond the Headlines
These family-focused provisions represent a real opportunity for many working families, but they work best when they’re part of a broader tax strategy. The temporary nature of the tips and overtime deductions means you shouldn’t make permanent financial decisions based on them. Instead, consider using the tax savings to build emergency funds, pay down high-interest debt, or increase retirement contributions.
The enhanced Child Tax Credit, being permanent, gives you more planning certainty. For families with multiple children, that extra $200 per child every year adds up to meaningful money over time that can support longer-term goals like education savings or home purchases.
If you’re an employer reading this, now is the time to work with your payroll provider to ensure you can properly report overtime compensation separately on 2025 W-2s. Your employees are counting on this for their tax planning.
The Bottom Line for Families
The OBBBA’s family provisions aren’t perfect, and they’re not as sweeping as some of the headlines suggested. But they do represent real money for many working families, particularly those in service industries where tips and overtime are significant parts of compensation. The key is understanding how they actually work, what you need to do to qualify, and how to integrate them into your overall financial planning.
The enhanced Child Tax Credit provides immediate, permanent relief for families with children. The tips and overtime deductions offer substantial savings for qualifying workers, but with important limitations and requirements. Together, these changes could put thousands of dollars back in working families’ pockets each year.
What matters most is making sure you’re positioned to take full advantage of these benefits when you file your 2025 return. That means starting your documentation now, understanding the qualification requirements, and working with professionals who can help you navigate the complexities.
At JCT Tax Solutions, we’re here to help families understand exactly how these changes affect their specific situations and develop strategies to maximize their benefits while building long-term financial security. Because at the end of the day, it’s not just about understanding the new law—it’s about making sure it works for your family’s unique circumstances.
The information provided in this blog is general in nature and has not been customized for your specific tax situation. Tax laws can be complex, and individual circumstances vary. For personalized advice regarding how OBBBA provisions affect your family, please schedule a consultation with our professional team.
