Unveiling Tax Changes: Tips, Overtime, and more | 33

No Tax on Tips & Overtime? What It Really Means (Plus the New Senior Deduction)

Host Chey, Remote Bookkeeper and Judgment Free Money Coach explains key parts of Trump’s “big, beautiful bill” being asked about during tax season, focusing on how the changes work as deductions that reduce federal taxable income rather than making income tax-free. The episode covers the temporary “no tax on tips” provision for tax years 2025–2028, the  “no tax on overtime” deduction and explains a new additional senior deduction starting in 2025.

01:38 No Tax on Tips Explained
05:20 No Tax on Overtime
07:50 Senior Extra Deduction

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Transcript

 Welcome to Money and Magic, the podcast that combines the mystical with the practical to help you navigate money in the muggle world. I'm your host, Shai Remote Bookkeeper and Judgment Free Money Coach. I hope this podcast helps you create a harmonious relationship with your finances that empowers you to lead your truly magical life.

Let's get started.

Hey, magical human. Welcome back to Money and Magic. I cannot tell you how happy I am to be behind this mic again. This season is definitely going to be a bit more feral. So buckle your seat belts. This is our first episode back on the money side of things, and it might not be a fun one, but it is important.

So we are currently in the middle of tax season. I am getting a lot of questions about Trump's big, beautiful Bill, so no tax on tips, no tax on overtime. What does all of this actually mean? You are about to find out. So let's get into it. I do want to note that I am not breaking down how taxes work in this episode.

So if you are looking for a better understanding of that, you can go back to episode 12 where I do break down the tax basics. So let's talk about no tax on tips. This has been one of my most commonly asked questions. So one thing I wanna mention with this is it is temporary. It is for tax years 2025 through 2028.

And what this is, is if you are someone who works in a tipped occupation, you can deduct up to 25,000 of your reported tip income. So basically what this means is all of your income is still reported on your W2, and then when you file your taxes. The amount of that that was tip income is taken off. So this just reduces your taxable income.

It doesn't mean that you're not paying taxes on it. So what is a tip? Occupation? Well, that's a tricky question. The IRS or the big beautiful Bill pretty much says that it has to be customary for you to be tipped in your industry. So obviously people in the service industry, servers, bartenders, things like that.

Um, if you do any type of service work, hair stylists, people who work at hotels, different types of surf industry, that makes sense. Um, if you're a car salesman. You're probably not getting a tip when you sell a car, so it just says that it has to be customary to be tipped regularly. The other caveat to this is if you are self-employed, your tips must be reported on a 10 99 form.

So for most people, this will come on your 10 99 K from your payment processor. But if you get cash tips. They are not actually ran through your system. You cannot deduct those. Um, honestly, that makes sense because most people aren't usually claiming those cash tips anyway, even though legally you are supposed to.

I'm not telling you not to. I'm telling you to report. Every dollar of income, because that's what the IRS wants you to do. But we do know that a lot of people don't always report a hundred percent of their cash. And the IRS knows that as well. So it's kind of a double whammy. They're not gonna let you use cash that you wouldn't typically report anyway as a deduction.

But if someone pays you, if the cash tip and it's run through your system, it's on that 10 99 k. Then you can absolutely deduct that. So a quick example. Let's say a server earns $45,000 in wages for 2025. 20,000 of those are tips. So on the W2 you'll see 45,000, and that's the total amount. If they included it, it'll be on line 14, it'll say 20,000.

If not, it'll be on your last pay stub. So what you can deduct is that $20,000 because it's under the limit of 25,000. So instead of being taxed on $65,000. You are only taxed on the 45,000 wages, not the $20,000 of tips. So that's kind of how that works. If you are using a tax system or a tax preparer, they'll handle that portion for you.

Um, I recommend free tax USA if you're doing it yourself. So that's just a side note. Um, but other than that, that is pretty much the no tax on tips. Now this is gonna be a shocker. But no tax on overtime is pretty similar. This one is also temporary, 2025 to 2028, and what this is is a deduction of the overtime premium portion, so it's not the entire overtime check, just that extra half.

So when you get overtime pay, it's time and a half. Only the half is what is deductible. And the limits on this are if you file single. 12,500. If you file a joint tax return, it's 25,000. So let's say you make $20 an hour, your overtime pay is time and a half, so that's $30 an hour. The deductible portion of this is that $10 extra.

So let's say you earned $8,000 in overtime premium for the year. That 8,000 is gonna reduce your taxable income, just like the prior example, the $20,000 tips. So it is gonna help a lot of people. Get into different tax brackets and it is, I've seen it already and a lot of my clients being very beneficial, especially for the factory workers and the service industry people.

Um, they're seeing some good. Good stuff from this. If you have listened to me, if you know anything about me, I am a avid Donald Trump hater. Um, I don't know if the NSAs listened to this, probably. If so, oh, well that was a joke, but. This is something that I do really like. I think it's kind of cool that people who work their asses off do get a little bit of a break for that.

Um, so definitely take advantage of that because it is something that you have for the next few years. Um, and I think it's, you should definitely take advantage of that. I have one more thing that I wanna talk about when it comes to this. This bill is full of so many different things, but a lot of them are very niche or nuanced, and they depend on your tax situation.

So the reason I chose to discuss these topics today is because they have been most prominent in my business personally. S and that's what I've gotten the most questions on in my friend groups and networking groups and things like that. So the last thing I wanna touch on is the senior additional tax deduction.

So this starts in 2025, and it is for taxpayers who are 65 or older, they get to claim an additional $6,000 tax deduction simply for being a senior. And so this is 6,000 for a single filer, 12,000 for a married couple if both of the spouses are 65 or older. So if one spouse is 65 and one is 64, they only get the 6,000.

Now this is in addition to the regular standard deduction that they would get for a senior, so this is pretty cool. This is gonna help reduce a lot of seniors income. In order to get this deduction. They literally have to be 65 or older by the last day of the tax year, which is December 31st. Have a valid social security number and file the return correctly.

That's it. So that's pretty cool. An extra $6,000 deduction. Now this is not refundable, so a deduction does not mean that the person who is 65 or older gets $6,000 back. It also doesn't mean that that $6,000 is tax free or something like that. I've seen a lot of people, uh, who like to listen to the president, uh, who has no clue what he's talking about.

So this is literally just a deduction. If a person had $56,000 of income and they're over 65, they get $6,000 as a deduction. So then they have $50,000 income. That's it. It's literally that. Uh, but it is pretty cool and I hope it's something that they continue with because I do think seniors get hit really hard and this is a good way to help them out a little bit.

All right. Magical human. You did great. This was a short episode. I just really wanted to cover those few things because I've been getting a lot of questions. I want you to have resources. I want you to know what's going on. If you need a better understanding, you can always reach out. I'll be glad to help you.

Um, here's a few things that I want you to actually remember from this episode. No tax on tips does not mean that the tips are not taxed. They still get reported. You still pay Social Security and Medicare, what changes is that you might be able to deduct up to $25,000 of that income from your federal taxable income.

That's it. Along those same lines, no tax on overtime does not mean your entire overtime check is tax free. Only that extra half, that premium portion, that is what's deductible and it's capped. And lastly, the senior deduction, 65 or older, starting in 2025, you get an additional $6,000 deduction on top of the standard deduction.

So yes, there are benefits, but these are deductions. They're not magic spells that make your income disappear. They're not tax free income. They lower your taxable income. They do not eliminate taxes entirely, no matter what other people. Power might tell you. So my advice is don't build your financial strategy off of a headline or the words of a senile old man.

Build it off of facts and resources from people you know and trust. Alright, that's it for today's Money Magic. I will see you in the next one where we hop. Back into my divorce talk and we are going to talk about the things I have learned about money since my divorce. I will see you then and that's a wrap for another spell binding episode of Money and Magic.

I hope you learned something that can help you navigate money in the muggle world. If you have any questions, topics. Or even your own money and magic story that you'd like to share, reach out to me on social media. I'd love to hear from you, and if you have found the show insightful, I'd truly appreciate it.

If you could take a moment to subscribe, leave me a review and share money and magic with your friends and family. Think of it like casting a spell to help others on their financial journeys. As always, stand tall, shine bright. And stay grounded. I'll see you next time.