Under updated guidance from the Internal Revenue Service, eligible taxpayers can deduct up to $25,000 in reported tip income for the 2025 tax year, provided their modified adjusted gross income remains below $150,000 for single filers or $300,000 for joint filers. This deduction applies whether individuals itemize or take the standard deduction, offering broader access to federal tax relief.
However, federal provisions do not override state tax systems. In Illinois, for example, residents must continue to report and pay taxes on tip income under the state’s flat income tax rate of 4.95%. Efforts by state lawmakers to align with federal policy have not yet advanced, leaving current rules unchanged for the 2025 filing cycle.
Similarly, taxpayers in Indiana are required to include tip income in their 2025 state returns. Officials have indicated that policy changes aligning with federal deductions are expected to take effect starting with the 2026 tax year.
Overtime earnings are also affected under the federal law, with eligible workers able to deduct up to $12,500 per taxpayer, subject to the same income thresholds. However, eligibility may be limited for employees whose overtime pay is governed by collective bargaining agreements, making professional tax guidance advisable.
At the state level, overtime income remains taxable in both Illinois and Indiana for the 2025 tax year. While federal deductions offer temporary relief, experts note that payroll taxes may still apply, and state-level obligations continue to create a patchwork system that varies widely depending on location.
