Looking forward to a tax break from the new law implementing President Donald Trump’s promise to cut taxes on overtime or tips? You may be disappointed.

“There’s an expectations gap here,” said Andrew Lautz, director of tax policy at Washington’s Bipartisan Policy Center.

“Tips and overtime deductions are going to provide a meaningful and significant cut for some taxpayers,” he said, “But what we’re seeing in the early reaction from the public is that the tax cut may not be as large as the general public expects.”

It’s also not entirely what Trump claimed. The president made a campaign pledge last year to do away with taxes on tips and “end all taxes on overtime.” Democratic opponent Kamala Harris supported a limited tax break for tips.

When Trump signed the Big, Beautiful Bill into law last month, a White House fact sheet trumpeted how it included “NO tax on tips. NO tax on overtime.” But that’s not entirely true.

“While headline writers still describe the changes in the same vivid terms, the reality is far different. And much less generous,” said Howard Gleckman, senior fellow at the nonpartisan Tax Policy Center.

The tax break

“I think ‘gimmick’ is the right word,” said Alex Muresianu, senior policy analyst at the Tax Foundation, when asked to characterize the breaks. He said the changes “should provide some benefit to narrow subsets of taxpayers.”

The bill provides no tax on tips up to $25,000 on federal income tax from this year until 2028. Qualifying taxpayers can deduct the tip amount from taxable income whether or not they itemize deductions. The break is available to those with modified adjusted gross incomes of less than $150,000; it is phased out as incomes get higher.

Employees can also deduct up to $12,500 in overtime pay, $25,000 if filing jointly, from taxable income from this year until 2028.

The provision, though, does not apply to all employees who work more than the standard 40 hour workweek.

Not eligible, for instance, are those who accept what the Bipartisan Policy Center called “a pre-agreed upon amount that does not fluctuate with hours worked or the quality of the job done.” Also not eligible is an employee who performs some administrative or so-called “white collar” duties.

For those who can deduct overtime pay, they could deduct the half in the 1 1/2 times regular pay they get for working beyond the standard 40-hour workweek.

The break can be claimed whether or not someone itemizes deductions, and is phased out starting at $150,000 for single taxpayers and $300,000 for joint filers.

Too complicated?

Taxpayers could find all this complicated. Lautz said that people may not understand that the qualifying amounts are deducted from income, not taxes themselves.

And questions remain about just who can take the deduction.

“One Big, Beautiful Bill’s translation of President Trump’s campaign trail promises on tips and overtime used fairly conservative language — hard caps on the amounts, some income restrictions, expiration dates, and a few explicit details on what qualifies as tips,” said Pete Sepp, president of the National Taxpayers Union, a conservative watchdog.

As a result, he said, “the population of taxpayers qualifying for relief is a significantly smaller subset of taxpayers who receive tips or put in overtime.”

One problem could be defining whose overtime or tip pay qualifies. The Internal Revenue Service, he said, “still has considerable latitude in writing the final rules, especially on tips.” Those rules are expected from the Treasury Department no later than Oct. 2.

“Plenty of people might get the occasional tip in their lines of work, like fitness instructors or tour guides, but are those customarily tipped professions that will be published on the IRS’s list this fall? No one is certain,” Sepp said.

The law says that only workers whose tips are given “customarily and regularly” are eligible.

Who qualifies?

There are also questions about the reach of these breaks.

“Most workers don’t get tips or overtime pay,” explained Gleckman.

The lowest paid workers already pay no income tax. As a result, he said, more than 99% of households making less than $35,000 — the lowest income 20% — ”gain nothing from the deductions for tips and overtime.”

In Sacramento County, California, the average tax reduction from the tip provision is estimated to be $52 and from the overtime measure, $239, according to a Tax Foundation study.

Lautz of the Bipartisan Policy Center posed several questions yet to be answered about the tip tax break.

He asked: Do workers shift away from non-tipped occupations and towards tipped occupations? Do consumers change tipping habits? Do Treasury regulations expand the tips deduction (or foreclose it) to workers, employers, or occupations that were not (or were) expecting to benefit from it?

“It is unclear if, when, or how the deduction may change economic behavior,” Lautz said.

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