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No Tax on Tips and Overtime: Phase-Out Explained
Educational information only. Not tax advice. Not affiliated with the IRS. Check IRS.gov or a tax professional about your own situation. Last checked against IRS sources: October 17, 2026. Examples use made-up numbers.
Short answer: The tips and overtime deductions are reduced when MAGI is above $150,000 ($300,000 if married filing jointly). On the 2025 Schedule 1-A, each reduction is $100 for each full $1,000 of MAGI above the threshold. The form computes the reduction separately in Part II (tips) and Part III (overtime), each against its own capped amount.
What the form does (Schedule 1-A, 2025)
MAGI (Part I): line 1 is Form 1040 line 11b, plus any excluded Puerto Rico income and certain Form 2555/4563 amounts (line 2); line 3 is the total MAGI.
Tips (Part II):
- Line 7: smaller of line 6 or $25,000.
- Line 8: MAGI (line 3). Line 9: $150,000 ($300,000 MFJ).
- Line 10: line 8 minus line 9. If zero or less, the line 7 amount is the deduction.
- Line 11: line 10 divided by $1,000, rounded down to a whole number (1.5 becomes 1, 0.05 becomes 0).
- Line 12: line 11 × $100.
- Line 13: line 7 minus line 12 (not below zero).
Overtime (Part III): same pattern: line 15 (smaller of line 14c or $12,500, $25,000 MFJ), lines 16 to 20, and line 21 equals line 15 minus the reduction.
Because the reduction is computed on each part, a taxpayer with both tips and overtime has the $100-per-$1,000 reduction applied to the tips amount and to the overtime amount, according to the form's layout. We read the form; we did not find IRS commentary beyond the form and FS-2025-03 on this.
Worked examples (made-up)
| Case | Capped amount | MAGI | Line 10 | Line 11 | Reduction | Deduction |
|---|---|---|---|---|---|---|
| Single, tips | $10,000 | $162,400 | $12,400 | 12 | $1,200 | $8,800 |
| Same person, overtime | $5,000 | $162,400 | $12,400 | 12 | $1,200 | $3,800 |
| Single, tips | $2,000 | $175,000 | $25,000 | 25 | $2,500 | $0 |
| MFJ, overtime | $14,000 | $310,500 | $10,500 | 10 | $1,000 | $13,000 |
In the first two rows the same person gets $8,800 and $3,800 = $12,600 in total deductions before other limits.
MAGI
Schedule 1-A MAGI is not the same as AGI: it adds back certain exclusions. Use the form's lines.
Other limits
Valid SSN, joint return if married, SSTB, listed occupation.
FAQ
Does a $1 over the threshold reduce it? No: the quotient is rounded down, so an excess of less than $1,000 gives a zero reduction.
Do these figures change each year? The law applies for 2025 through 2028; the thresholds as shown on the 2025 form are what we read. Check each year's form.
Is there a calculator? Yes: use the free in-browser estimator (nothing is stored or sent).
What we could not verify
- 2026 Schedule 1-A thresholds and line numbers.
- Whether the statute indexes any amounts.
Sources (IRS)
- IRS, Schedule 1-A (Form 1040), Additional Deductions, 2025 (created 11/4/25) — https://www.irs.gov/pub/irs-prior/f1040s1a--2025.pdf (read October 17, 2026)
- IRS, One Big Beautiful Bill Act: Tax deductions for working Americans and seniors, FS-2025-03 (July 14, 2025; updated July 25) — https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors (read October 17, 2026)
- IRS, 2025 Instructions for Form 1040 — https://www.irs.gov/instructions/i1040gi (referenced in the brief; not re-read for this page)
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Not tax advice. Examples use made-up figures. Nothing here has been reviewed by a tax professional. See the disclosure.