The Federal Reconciliation Bill (H.R.1) passed last July, which has also been called the One Big Beautiful Bill, overwhelmingly benefits the wealthy and corporations with huge tax cuts, partially paid for by massive cuts to health care and food assistance that folks across the country rely on. In an appeal to everyday Americans, so-called “middle-class” tax cuts, like no tax on tips or no tax on overtime pay, were included in this bill.
However, these provisions are poorly designed, expire in a few years, do little to help those who need it most, create inequities among workers, and reach only a small number of folks. Working-class families will be overwhelmingly hurt by this law’s huge cuts to the basic needs services they rely on, and these tax exemptions will not come close to making up the difference.
Most households will not benefit from tax deductions on tips and overtime pay
While their proponents sold these policies as “no tax on tips” and “no tax on overtime income,” what they actually do is more limited. Instead, they provide temporary new federal income tax deductions on up to $25,000 of qualified tip income and up to $12,500 of overtime income earned during the year. This reduces the amount of income subject to federal income taxes.
These tax breaks are not focused on struggling workers and families. Married couples can claim a deduction as long as their household incomes are below $550,000, and those with other filing statuses can qualify with incomes up to $400,000.
Income tax deductions on tips and overtime pay are not going to help the workers who make the least and need a boost to their income the most. Only a small fraction of American workers earn tips or overtime pay, and even fewer workers are actually benefitting from these provisions when taking into account how they work. The Tax Policy Center estimates that only about 3 percent of households will benefit from the deduction for tip income and only 9 percent would benefit from the deduction for overtime pay.
And those who do qualify may find them difficult to claim. Just the process of filing taxes will be more difficult for people seeking these deductions, adding 34 additional minutes to file taxes for each deduction, according to the Yale Budget Lab. These poorly designed tax deductions do little for lower-income workers, and they do more for those with higher incomes.
An income tax deduction is an ineffective way to boost the incomes of struggling workers. Lower-income income people pay a greater share of their federal taxes through payroll taxes. They often do not make enough money to pay much in federal income taxes, so an income tax deduction does little or nothing for them.
In practice this means that, for example, a single worker with one dependent making $22,250 a year of taxable income including $12,000 in tips will see no benefit from a tax deduction on tips because their earnings are too low to have federal income tax liability.
At the same time, tax deductions are worth more for folks with higher hourly wages who are in higher tax brackets. A secretary making $20 an hour while working 10 hours of time and a half overtime will have $100 in tax-exempt income, while another worker putting in the same amount of overtime but making $100 an hour would have $500 in tax-exempt income. The Oregon Center for Public Policy’s analysis makes it clear that people who earn more are benefitting the most from these provisions, while people who are struggling to get by are getting little to no benefit at all.
In 2026, claiming a tax deduction on tips will provide the largest tax cuts (measured as a share of after-tax income) to the fourth quintile of taxpayers making between $119,200 and $217,100. Claiming a tax deduction on overtime pay will provide the largest benefits to higher-income households making between $100,000 and $500,000.
Providing tax breaks for specific kinds of income is unfair
These provisions mean that households in very similar income situations will be paying different amounts of taxes based solely on how they earn their income. This violates the tax principle of “horizontal equity,” which seeks to have similar tax treatment for households with similar incomes and economic circumstances. Instead, H.R.1 makes the tax system more unfair, where a tipped server at a restaurant could pay less in income taxes than the grocery store clerk, even if their incomes were similar.
Deductions on tips and overtime create negative incentives and open the door to abuse
Behavioral changes from employers could also hurt workers who get tips and overtime pay. The deduction for tips may discourage employers from increasing employees’ base pay because of the assumed increase in employees’ after-tax income.
Furthermore, deductions from overtime undermine the 40-hour work week, despite public sentiment that workers should be working fewer hours, not more. This policy could encourage employees who can, to work excessive hours. Overtime is more available to those who may have fewer care responsibilities, disadvantaging workers with health needs or other obligations that prevent them from working beyond the 40-hour work week.
So-called “no tax on tips and overtime pay” distract from how bad H.R. 1 is for the working class
H.R. 1 is a huge federal law that makes devastating cuts to safety net services people rely on, in order to help pay for massive tax cuts that primarily benefit the wealthy and corporations. Within this package, tax deductions for tips and overtime income only make up $121.2 billion of the $4.5 trillion total spending over 10 years. Meanwhile, the 1 percent highest-income households will get $117 billion in net tax cuts from H.R. 1 in 2026 alone.
Another contrast is that tax deductions on tips and overtime are temporary; they will expire at the end of 2028. The tax cuts that benefit the wealthy, on the other hand, are mostly permanent.
The potential income gains from tax deductions on tips and overtime pay are a drop in the bucket compared to economic harms that working people face from federal policies. Many working-class Americans also will be slammed by cuts to Medicaid and SNAP that will make it much more difficult to pay for and access health care and food. When these cuts and the Trump Administration’s tariff policies are taken into account, the Yale Budget Lab estimates that households of every income group making less than $218,026 will suffer a reduction in their average resources over 10 years.
Policymakers should have prioritized policies so that all working-class Americans can afford their lives and build stronger futures
There are proven policies that would better address the challenges everyday working people face.
These include increasing the minimum wage and eliminating the subminimum wage allowed for tipped employees in some states, expansions of income-boosting tax credits like the Child Tax Credit and Earned Income Tax Credit, and bringing down the cost of health insurance by reinstating and making the enhanced premium tax credits permanent. And a better approach would raise revenues by making sure the wealthy and most profitable corporations pay more to fund essential public services so that more people have what they need to survive and thrive.