As lawmakers continue to debate sweeping changes to the U.S. tax code, the U.S. House of Representatives has introduced a comprehensive proposal known as the “One Big Beautiful Bill”. While this bill is still under consideration and has not been signed into law, it offers insight into the priorities and direction of current tax policy discussions.
This article is part of our ongoing series examining key provisions of the bill and what they could mean for taxpayers if enacted. Catch up on the rest of the series:
- The House Tax Bill: Analyzing the SALT Cap
- The House Tax Bill: Analyzing the Standard Deduction
- The House Tax Bill: Analyzing the Total Itemized Deduction Limitation
- The House Tax Bill: Analyzing the Child Tax Credit
Note: This is proposed legislation and has not been signed into law. The information provided is for informational purposes only. Provisions are likely to change before final passage, but the bill offers a window into lawmakers’ current thinking on tax reform.
Political promises
While campaigning for president, Donald Trump pledged to eliminate federal income taxes on both tips and overtime pay. Promises like this are challenging to implement without creating incentives for individuals to shift income into the newly tax-free categories. As a result, the provisions in the One Big Beautiful Bill are relatively complex.
The rules
The House bill introduces two new sections to the Internal Revenue Code: Section 244, which provides a deduction for tip income, and Section 245, which offers a deduction for overtime pay. Importantly, income from both tips and overtime must still be reported and included in gross income and adjusted gross income (AGI). If applicable, the deductions would apply after AGI is calculated, regardless of whether the taxpayer itemizes or stakes the standard deduction.
To qualify, tips must be earned from occupations traditionally recognized as tip-based, as defined by the U.S. Treasury. In addition, they must have generally been occupations receiving tips prior to this legislation. This provision is designed to prevent employers from reclassifying wages or commissions as tips to exploit the deduction. Similarly, overtime pay must meet specific criteria to be eligible.
In both cases, the deductions are unavailable to highly compensated employees (defined as those earning over $160,000 in 2025). Additionally, the deductions would only apply for tax years 2025-2028.
Conclusion
While the One Big Beautiful Bill is still moving through the legislative process, the proposed deductions for tip and overtime income reflect a broader effort to reshape how certain types of labor are taxed. If enacted, these provisions could offer meaningful tax relief to many workers. However, they also raise concerns about fairness, complexity, and the potential for abuse. As with all proposed legislation, the final version may differ significantly from the current draft. Taxpayers should stay informed and consult a tax professional before making any decisions based on the current draft.
If you’re a Mercer Advisors client and have questions about the One Big Beautiful Bill and its impact to your financial plan, please contact your wealth advisor. Not a Mercer Advisors client? We connect the dots of your financial life by unifying financial planning, investment management, tax, estate, insurance, and more. When you’re ready to amplify and simplify your financial life, let’s talk.
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