President Trump’s One Big Beautiful Bill (OBBB) implements tax changes designed to simplify filing and keep more earnings in Americans’ pockets. The law adjusts how the IRS treats certain types of income, updates annual gift limits, raises the estate tax exemption, and adds fresh deductions for tip earnings and overtime pay. Here’s what’s changing.

Broader Definition of Nontaxable Income

The bill expands what counts as nontaxable income, meaning certain types of income will now be excluded from federal income tax. Traditionally, nontaxable income included things like child support, alimony, workers’ compensation, and Roth IRA contributions.

Now, under the OBBB, certain tips and overtime pay also qualify for deductions that reduce taxable income. That doesn’t mean they’re completely tax-free (Social Security and Medicare taxes still apply), but it does mean a lower federal tax bill overall.

Overtime Deduction

Overtime pay has always been taxed just like regular earnings, but the OBBB changes that by introducing a new deduction: up to $12,500 for single filers and $25,000 for joint filers can be subtracted from taxable income each year.

This deduction applies to tax years 2025 through 2028. It begins to phase out for taxpayers earning more than $150,000 (single) or $300,000 (joint) in modified adjusted gross income (MAGI).

For workers who rely on overtime pay to make ends meet, this deduction could mean a significant amount in savings each year.

Deductions for Qualified Tip Income

The OBBB also introduces a new rule for qualified tips. Eligible employees can now deduct up to $25,000 per year of tip income from their taxable earnings. To qualify, tips must be voluntarily given and received through cash, card, check, or digital payment apps. However, automatic gratuities (like restaurant service charges for large parties) don’t qualify because they’re not considered voluntary. Like the overtime deduction, this deduction is also valid from tax years 2025 through 2028.

Higher Gift Tax Limits

The annual federal gift tax exclusion has increased from $18,000 to $19,000 per recipient. That means you can gift up to $19,000 to as many people you want each year without filing a gift tax return or paying any tax on it. It’s a small increase, but for families assisting loved ones with major expenses like college tuition or a first home, it’s a helpful move.

Estate Tax Exemption

The federal estate tax exemption is the amount of wealth you can pass to heirs without activating the estate tax. At the end of this year, the exemption was set to revert to the pre-2017 Tax Cuts and Jobs Act (TCJA) levels of $5 million per person. However, starting in 2026, the threshold rises from $13.99 million to $15 million per person ($30 million for married couples). This limit is permanent (barring any amendment or repeal in future legislation) and indexed for inflation starting in 2027, ensuring that it continues to rise over time.

This update means fewer wealthy families will face the estate tax, and gives these households more predictability for long-term planning.

The OBBB implements a handful of new, targeted tax breaks. Consult a tax professional to understand how these changes could apply to your situation and make the most of any tax breaks you qualify for.