OBBBA Income Limits: How the Tips and Overtime Deductions Phase Out Above $150K

Both OBBBA deductions are means-tested. Once your modified adjusted gross income (MAGI) crosses $150,000 — or $300,000 if you're married filing jointly — the deduction starts to shrink by $100 for every $1,000 of income above that line. Earn enough and it disappears entirely. For a single filer, the tip deduction zeroes out at $400,000 of MAGI, and the overtime deduction is gone by $275,000.

How the phase-out works

A phase-out gradually reduces a tax benefit as income rises, instead of cutting it off at a hard cliff. For the OBBBA tips and overtime deductions, the reduction is $100 for every full $1,000 of MAGI above the threshold — $150,000 for single and head-of-household filers, $300,000 for joint filers (IRS).

MAGI here is essentially your adjusted gross income with a few items added back. For most workers with wages, tips, and overtime, it's very close to total income — which means hitting these thresholds usually takes a high salary or a second earner, not tips alone.

Where each deduction hits zero

Because the cap sizes differ, the deductions phase out at different income levels. The math is just the cap divided by the $100-per-$1,000 rate, added to the threshold:

• Tips, single: $25,000 cap, fully phased out at $400,000 MAGI ($150,000 + $250,000)
• Tips, married filing jointly: $25,000 cap, fully phased out at $550,000 MAGI
• Overtime, single: $12,500 cap, fully phased out at $275,000 MAGI
• Overtime, married filing jointly: $25,000 cap, fully phased out at $550,000 MAGI

A worked example

Suppose Priya is single with $190,000 of MAGI and $20,000 of qualified tips. Her MAGI is $40,000 over the $150,000 threshold. At $100 per $1,000, that's 40 × $100 = $4,000 of reduction. Her $20,000 of tips sits under the $25,000 cap, so she starts at a $20,000 deduction and loses $4,000 — leaving a $16,000 deduction.

Push Priya's MAGI to $300,000 and the reduction grows to $15,000 ($150,000 over the line, divided by $1,000, times $100), cutting her deduction to $5,000. By $400,000 of MAGI, the entire deduction has phased out and her tips are fully taxable again at the federal level.

The calculator applies your exact MAGI and phase-out automatically — no arithmetic required → Tips & Overtime Calculator.

If you claim both tips and overtime

Many workers qualify for both deductions, and the phase-out applies to each using the same MAGI thresholds. A tipped employee who also works FLSA overtime can stack both deductions, but both shrink together as income climbs past $150,000 or $300,000. The combined benefit is largest for workers below the threshold — exactly the group Congress targeted.

Why the thresholds matter for two-income households

The common surprise is a dual-earner couple whose combined MAGI clears $300,000 even though neither spouse feels 'high-income.' Because married workers must file jointly to claim either deduction at all, both incomes count toward the same phase-out. If you're close to the line, the timing of a bonus, a Roth conversion, or other income can swing how much of the deduction survives.

Adjusting your W-4 won't change the phase-out, but it does decide whether you get the savings per paycheck or as a refund. See Adjust Your W-4 After OBBBA, then fine-tune with the W-4 Estimator.

Frequently asked questions

What is MAGI for the OBBBA deductions?

Modified adjusted gross income is your adjusted gross income with certain items added back, such as the foreign earned income exclusion. For most wage earners it's nearly identical to AGI, so your salary plus tips and overtime is a close estimate.

Is the phase-out a cliff or gradual?

Gradual. You don't lose the whole deduction the moment you cross $150,000 — it erodes by $100 per $1,000 of excess income, so partial deductions are common in the phase-out range.

Do the thresholds adjust for inflation?

The statute sets fixed thresholds of $150,000 and $300,000 for the 2025–2028 window. They are not indexed for inflation during that period, so raises can pull more workers into the phase-out over time.

Does married filing separately work?

No. Married taxpayers must file jointly to claim either the tip or overtime deduction. Filing separately disqualifies you entirely, regardless of income.

Which income counts — gross pay or taxable income?

The phase-out uses MAGI, which is based on adjusted gross income — not gross wages and not taxable income after deductions. Pre-tax 401(k) and similar contributions lower your AGI and therefore your MAGI, which can help you stay under the threshold.

This article is for general educational purposes and reflects federal guidance available as of June 2026. It is not tax advice. Phase-out math interacts with your full return — consult a qualified tax professional about your circumstances.