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The Law creates a new IRC Section 224, which allows a federal income tax deduction for qualified tips of up to $25,000 for both employees and independent contractors for tax years 2025 through 2028. The deduction is available to itemizers and non-itemizers and begins to phase out for adjusted gross income (AGI) over $150,000 ($300,000 joint).
The Law also creates new IRC Section 225, which allows a federal income tax deduction for qualified overtime compensation of up to $12,500 ($25,000 in joint) that is reported on Form W-2 for tax years 2025 through 2028. The deduction is available to itemizers and non-itemizers and begins to phase out for AGI over $150,000 ($300,000 joint).
Also included in the Law is a statutory aggregation rule to IRC Section 162(m), which limits the deduction for compensation in excess of $1 million paid to covered employees of a publicly held corporation. When a specified covered employee is paid by different members of a controlled group, the amounts will be combined for purposes of the $1 million limit based on rules under IRC Section 414. The allowable deduction will be divided among the members based on their pro-rata share of the total compensation paid to the covered employee.