Retirement Taxes on Overtime and Tips: What the One Big, Beautiful Bill Changed  

When the One Big Beautiful Bill became law in July 2025, most of the focus landed on estate tax changes and frozen income brackets. However, tucked inside the legislation are two overlooked provisions that may be just as important for households approaching retirement. These deductions, available from 2025 through 2028, apply to two common sources of income for pre-retirees: overtime pay and tip income. 

Understanding how these deductions work can help individuals better coordinate income and taxes during the final years before retirement. They may also influence decisions around Medicare, Social Security, and when to begin drawing down retirement accounts. 

Overtime and Retirement Planning  

One of the provisions in the One Big Beautiful Bill allows taxpayers to deduct the premium portion of their overtime pay. This deduction is capped at $12,500 for individuals and $25,000 for couples filing jointly. 

Not everyone will qualify. The benefit begins to phase out once your modified adjusted gross income exceeds $150,000 for individuals or $300,000 for joint filers. Employers must also report overtime separately for it to be eligible. 

If you are working longer hours before retirement, this deduction may help reduce the impact of elevated income on your tax return. It may also influence when and how you begin retirement account withdrawals or plan large income events. This ties into broader financial planning considerations, including why retirement planning is important.  

Tip Income and Retirement Planning  

  Another lesser-known change affects reported tip income. Between 2025 and 2028, taxpayers may deduct up to $25,000 annually in tip income, provided the occupation is one the IRS identifies as customarily receiving tips. 

As with the overtime deduction, this benefit phases out once modified adjusted gross income reaches $150,000 for single filers or $300,000 for joint filers. 

For those supplementing income through part-time or service-based work, this deduction could help reduce overall taxable income. It may also support efforts to stay within important income thresholds tied to Medicare costs, Social Security taxation, and required minimum distributions. You can explore five ways to maximize Social Security benefits as part of that strategy. 

How These Deductions Interact with Retirement Taxes  

  The new deductions for overtime and tip income sit alongside other moving parts in retirement planning. They can affect how taxable income is calculated, which in turn shapes several key areas.  

  Lower taxable income may reduce how much of a Social Security benefit counts as taxable. For some households, it may also help keep income below the thresholds that increase Medicare premiums through income-related monthly adjustment amount (IRMAA). In addition, deductions can shift the way required minimum distributions interact with other income sources by keeping reported income from climbing as quickly.  

 These provisions are not a substitute for a complete retirement plan. Instead, they offer another factor to consider when looking at how income fits together during the transition from work into retirement.  

  Action Steps for Pre-Retirees  

 Begin by looking at your income level to see if you fall within the limits for these deductions. The rules phase out at certain thresholds, so knowing where you stand is the first step.  

 Keep thorough records of overtime pay and tip income. Employers may report these separately, but it helps to track them yourself to avoid mistakes or missed opportunities. For those considering part-time work, be mindful of how this income will be reported and how it interacts with the new provisions.  

 Timing also matters. Higher earnings in the years just before retirement can push taxable income up. Using these deductions in those same years may help balance that effect. If you are planning a major income event, such as a large withdrawal, these provisions may add context to when and how you take that step.  

Finally, place these deductions within your larger retirement strategy. They do not stand alone, but they can influence decisions about Roth conversions, required withdrawals, and even the start of Social Security benefits. Talking through the details with a financial professional can help you understand how these moving parts work together.  

Conclusion  

 The One, Big, Beautiful Bill introduced deductions for overtime and tip income that many people have not heard about. These changes are temporary, available from 2025 through 2028, and they may be worth reviewing for anyone nearing retirement who earns extra income in those years.  

To learn more about how these provisions work, download our free guide, 4 Hidden Deductions in the One Big, Beautiful Bill Every Pre-Retiree Should Know. If you have questions about how these deductions may fit into your own situation, our team is available to talk with you.  

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References  

  IRS. (July 14, 2025). One, Big, Beautiful Bill Act: Tax deductions for working Americans and seniors. https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors