A major change in U.S. tax law means your 2026 IRS tax refund could be much larger than you expect.
The One Big Beautiful Bill Act introduces new deductions for tip income and overtime pay starting in the 2025 tax year, which will directly impact returns filed in 2026.
These changes may lead to significantly higher refunds for eligible taxpayers.
Why Withholding Stays the Same in 2025
The IRS confirmed that payroll forms and withholding tables for 2025 will remain unchanged.
This is to allow a smooth transition into the new rules. Employers will continue to calculate federal withholding based on current guidelines, even though new deductions will apply when you file your 2026 return.
What Changes in 2026 – Key Deductions
From January 2026, taxpayers can claim two new deductions on their 2025 income:
| Deduction Type | Maximum Deduction | Joint Filers Maximum | Notes |
|---|---|---|---|
| Qualified Tip Income | $25,000 | Same as single | Applies to tip-earning jobs |
| Qualified Overtime Pay | $12,500 | $25,000 | Based on overtime earnings above regular pay |
Both deductions reduce taxable income directly, regardless of whether you itemize deductions.
They also include phase-out limits based on modified adjusted gross income.
Why Refunds Could Be Larger
Because withholding in 2025 won’t account for these new deductions, many workers in tipping professions or with substantial overtime will have paid more tax throughout the year than necessary.
When these deductions are applied during tax filing in 2026, the result could be a much bigger refund than usual.
Other Benefits in the New Law
The law also expands other tax relief measures that will apply from 2025 through 2028, including:
- Higher state and local tax (SALT) deduction limits for certain taxpayers.
- Additional benefits for seniors.
- An increase in the child tax credit.
These provisions can further enhance refunds for those who qualify.
How to Prepare for the 2026 Filing Season
To maximize your refund potential:
- Track your tips and overtime pay accurately throughout 2025.
- Keep pay stubs and documentation from employers for all additional earnings.
- Stay updated with IRS announcements, especially the list of eligible occupations for tip deductions and guidance on overtime eligibility.
- Consult a tax professional if your income situation is complex or close to phase-out limits.
The 2026 tax season may bring pleasant surprises for millions of Americans.
By allowing large deductions for tip income and overtime pay without changing 2025 withholding, the new law sets the stage for bigger refunds when filing your return.
The key is to keep thorough records in 2025 and understand how the new rules apply to your situation.
FAQs
Will my paycheck change in 2025 because of this law?
No. The IRS is keeping withholding rates and forms the same in 2025 to ensure a smooth rollout. Changes will be applied when you file in 2026.
How much could I save with the new deductions?
It depends on your tip and overtime earnings. The maximum deduction could lower taxable income by up to $37,500 for single filers or $50,000 for joint filers.
Do I have to itemize deductions to benefit?
No. These new deductions apply whether you itemize or take the standard deduction.