Tax season 2026 kicks off with big shifts for millions of Americans, thanks to new laws passed in 2025. Filers face fresh deductions on tips and overtime, plus other updates that could boost refunds or cut what people owe.
The Internal Revenue Service opens filing on January 26, 2026, marking the first time these rules from the One Big Beautiful Bill Act apply. This act, signed by President Donald Trump last year, aims to reward hard work and ease burdens on workers. Experts say these changes could mean larger refunds for many, but they also bring new steps for tracking income. States are adjusting too, with lower income tax rates in places like eight states starting this year.
Key Updates from New Legislation
The One Big Beautiful Bill Act brings deductions that let workers keep more of their earnings. For tax year 2025, which people file for now, tip income and overtime pay get special treatment. This retroactive setup covers earnings from January 2025 onward.
Filers can deduct up to $12,500 in overtime pay if single, or $25,000 if married filing jointly. Income limits apply, phasing out the benefit for those earning over $150,000 single or $300,000 married. Tips follow a similar path, with deductions up to $25,000 for many service workers. These moves encourage people to report earnings fully without fear of heavy taxes.
Experts point out that payroll taxes like Social Security and Medicare still apply to this income. The base pay for overtime hours remains taxable too. Still, the overall effect could add thousands to take-home pay for shift workers and servers.
No Tax on Tips: What It Means
Service industry workers stand to gain the most from the no tax on tips rule. This deduction rewards jobs in restaurants, hotels, and other tipped fields.
Under the new law, eligible tip income gets deducted from taxable earnings. Workers must track tips carefully, often using employer reports or personal logs. The IRS has issued guidance to help, including updates to forms like the W-2.
Many see this as a win for low-wage earners hit hard by inflation in recent years. For example, a server earning $20,000 in tips could slash their tax bill by thousands. However, the deduction phases out at higher incomes, so not everyone qualifies fully.
The rule ties into broader efforts to support the economy. Recent data shows tipped workers reported higher earnings in 2025, possibly due to this incentive.
Overtime Deduction Details
The no tax on overtime provision honors extra hours without extra taxes. It targets blue-collar jobs where overtime is common, like manufacturing and construction.
Qualifying overtime pay gets a deduction, but only the premium portion above regular rates. Employers use a new code on W-2 forms to report it, starting with tax year 2025 as a transition period.
This change could boost refunds amid rising costs. Labor stats from 2025 show overtime hours up 5 percent in key sectors, linking to economic recovery post-pandemic.
- Eligible workers: Those in hourly jobs with documented overtime.
- Deduction limits: $12,500 for singles, doubling for joint filers.
- Phase-out: Starts at $150,000 income for individuals.
- Impact: Could save an average family $1,200 in taxes, per expert estimates.
Filers should check their W-2s closely, as some employers lagged in updating systems last year.
Senior Deductions and Other Breaks
Older Americans get new help this tax season with expanded deductions. People 65 and over can claim up to $6,000 extra, easing retirement costs.
This ties into the bill’s focus on vulnerable groups. Combined with inflation adjustments, tax brackets rose 2.3 percent for 2026, keeping more income in lower brackets.
State changes add layers. Eight states cut individual income taxes, while four lowered corporate rates. Filers in places like these might see combined federal and state savings.
| Change Type | Details | Who Benefits Most |
|---|---|---|
| Senior Deduction | Up to $6,000 extra | Retirees 65+ |
| Tax Bracket Adjustment | 2.3% increase | All income levels |
| State Tax Cuts | Rate reductions in 8 states | Residents in those areas |
| Refund Boost | Larger average refunds | Middle-class families |
These updates reflect a push for fairness, but they require careful filing to avoid mistakes.
How to Prepare for Filing
Tax pros urge people to gather documents early. With changes in play, software updates and IRS tools can help navigate the new rules.
Start by reviewing your 2025 income sources. Update your W-4 if needed to adjust withholdings for next year. Free IRS resources offer worksheets for deductions.
Common pitfalls include missing overtime details on forms. Experts recommend consulting a preparer if your situation is complex.
Education is key this year. Many filers will spend extra time learning the rules, but the payoff could be worth it in refunds.
Challenges and Expert Advice
The quick rollout of these laws created hurdles. Some W-2s lack full overtime data because employers and the IRS needed time to adapt.
Tax consultant Tanya Baber noted that 2024 had few changes, making this year feel overwhelming. She advises budgeting more time for filing, especially for do-it-yourself folks.
Despite bumps, the changes aim to stimulate growth. Recent economic reports show consumer spending up 3 percent in late 2025, partly due to tax relief buzz.
Filers should watch for IRS updates, as draft forms could still shift. Staying informed ensures you claim every break you deserve.
What do you think of these tax changes? Share your thoughts in the comments and pass this article to friends who might benefit from the info.
