A married couple with income above $300,000 starts to lose the new federal deductions for tips and for overtime pay. The IRS says both deductions phase out at the same line: modified adjusted gross income over $300,000 for joint filers, and over $150,000 for taxpayers who do not file jointly. Below that line, the deductions apply at the size the law allows.

The rules come from the Working Families Tax Cuts law, which the IRS summarizes under Section 70201 for tips and Section 70202 for overtime. Both are deductions, not credits. They lower taxable income instead of cutting the tax bill dollar for dollar, and the IRS puts a ceiling on how large each can be.

The question for working couples is whether household income lands under $300,000. Spouses who earn tips, or who are paid overtime, should add both paychecks and any other income before assuming the deduction applies in full. Couples near the line have the most to sort out at filing time, because the deduction shrinks above it.

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Where the $300,000 line sits

The IRS Working Families Tax Cuts summary states the phase-out the same way for both deductions: “Phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).” Modified adjusted gross income is the income measure the IRS uses for these limits, so the test is applied to the whole return and not to tips or overtime alone.

That matters most for two-earner households. Pay from both spouses and any other income count in the same joint figure, so a couple whose tipped worker earns little can still land over $300,000 because of the other spouse’s pay.

The IRS calls it a phase-out. That means the deduction shrinks as income rises past the line instead of stopping at a single dollar. A couple at $310,000 is over the line on both deductions, and a couple at $290,000 is under it on both.

Taxpayers who do not file jointly face the $150,000 line. Married taxpayers are told to file jointly to claim either deduction, according to the IRS, so for most married workers $300,000 is the number that counts.

The line is not a limit on who may earn or work. It is only the point where the deduction starts to shrink, and the same $150,000 and $300,000 figures appear in both the tips and overtime sections of the IRS summary.

What each deduction covers

On tips, the IRS puts the maximum annual deduction at $25,000. “Qualified tips” include voluntary cash or charged tips received from customers, including shared tips. They must come from an occupation “customarily and regularly receiving tips,” and the IRS says those occupations were identified on or before December 31, 2024.

On overtime, the maximum annual deduction is $12,500, or $25,000 for joint filers. The deduction covers only the extra portion of overtime pay above a worker’s regular rate, such as the “half” in time-and-a-half. Overtime has to be reported on Form W-2, Form 1099 or another information return.

The IRS lists the two deductions separately, each with its own ceiling. A worker can ask about tips, about overtime, or about both, and each has to be figured against the same income line.

Both deductions are open to people who itemize and people who take the standard deduction, the IRS says. Both require a Social Security number on the return. Employers and other payors must report certain cash tips and qualified overtime, and the IRS says Treasury will provide penalty relief on tips reporting and transition relief on overtime reporting for tax year 2025.

Jobs and income that fall outside the rules

For tips, the IRS excludes people who are self-employed in a “Specified Service Trade or Business” under Section 199A of the tax code, and employees of an employer in one. That exclusion applies whatever the household earns. A worker in a covered business gets no tips deduction even at an income far under $300,000.

Self-employed tip earners face another limit. Their deduction cannot exceed the net income from the business where the tips were earned, figured before the tips deduction, according to the IRS summary.

The same law created a separate deduction for older taxpayers, and its income line sits lower. The IRS says the enhanced senior deduction phases out over $75,000 of modified adjusted gross income, or $150,000 for joint filers, which is half the tips and overtime line. A retired couple with a working spouse may meet both lines on one return.

For households near the top of the range, the IRS summary is the place to see where each phase-out begins. Couples well under $300,000 can expect the maximums described above, subject to the other rules. The open question for a household close to the line is how much of the deduction is left once all income is counted.

Is the household close to the $300,000 line?

Tips and overtime are tax lines for people still working. Retirees face their own set of income lines, and crossing one costs real money: at the Medicare surcharge line, one dollar over can cost more than $1,100 a year per person.

Cut Your Retirement Tax Bill: 12 Moves lays out each of those lines in 2026 numbers, including the new $6,000 senior deduction ($12,000 for a couple) for 2025 through 2028 and how much of Social Security is taxed, worked out on one worksheet.

The 2026 numbers sit together on one page, and a large-print edition is included.

Get the 2026 retiree income lines, with 12 moves to stay under them, in a single guide →

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This article was produced with AI assistance and edited for accuracy against the sources linked above.