OB3 Act: Tax Relief on Tips, Overtime, and Social Security

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OB3 Act) into law. This legislation introduces new deductions designed to reflect his campaign promise of exempting tips, overtime, and Social Security from tax. While the provisions do not fully achieve a complete exemption, they provide meaningful, though temporary, tax relief for targeted groups.

1. No Tax on Tips

• Provision: The Act creates a new deduction under §224 (introduced by §70201).
• Period: Available from tax year 2025 through 2028.
• Limit: Up to $25,000 per year, regardless of filing status.
• Coverage: Applies only to cash tips (direct, credit card, or shared) that are:
  • Voluntary,
  • Not negotiated, and
  • Not mandatory service charges.

Key Points:

• The deduction is a below-the-line deduction, reducing taxable income but not Adjusted Gross Income (AGI).
• Only valid tips reported on Form W-2, Form 1099-K, Form 1099-NEC, or Form 4137 qualify.
• Deduction for the self-employed is limited to net business income. Example: If business profit is $4,320 but tips are $7,810, deduction is capped at $4,320.
• Deduction phases out by $100 for every $1,000 of Modified AGI (MAGI) over $150,000 ($300,000 for joint filers).
• Requires a valid Social Security Number (SSN) issued before the filing due date.
• Joint filing is mandatory for married taxpayers unless treated as unmarried under §7703.
• Additionally, §70201(e) expands the §45B FICA tip credit to include beauty service industries.

2. No Tax on Overtime

• Provision: The Act establishes a new deduction under §225 (introduced by §70202).
• Period: Applicable from 2025 through 2028.
• Limit: Up to $12,500 per year for single taxpayers; $25,000 for joint filers.
• Coverage: Applies only to the overtime differential — i.e., the extra amount earned above the regular pay rate.

Key Points:

• Deduction is below-the-line, reduces taxable income but not AGI.
• The overtime amount must be disclosed on Form W-2.
• Phase-out: Deduction reduced by $100 per $1,000 of MAGI over $150,000 ($300,000 joint).
• Requires a valid SSN issued before the return due date.
• Married taxpayers must file jointly unless qualifying as unmarried under §7703.

3. No Tax on Social Security (Senior Deduction)

• Provision: Introduced by §70103, this is not an actual exemption of Social Security income but a special deduction for seniors.
• Period: Available from 2025 through 2028.
• Eligibility: Individuals aged 65 or older.
• Limit: Annual deduction of $6,000.
• Treatment: Treated as part of personal exemptions under §151, reintroduced temporarily for this purpose.

Key Points:

• Deduction is below-the-line, reduces taxable income but not AGI.
• Phase-out: Deduction reduced by 6% of MAGI exceeding $75,000 ($150,000 joint).
• Requires a valid SSN issued before the filing due date.
• Joint filing is required for married taxpayers unless treated as unmarried under §7703.

Summary

The OB3 Act does not fully eliminate taxation on tips, overtime, or Social Security as suggested in political messaging. Instead, it introduces time-limited deductions (2025–2028) that reduce taxable income for:

• Workers in tipping occupations,
• Employees earning overtime pay, and
• Senior citizens (65+).

These measures provide targeted relief while maintaining existing tax structures.