No Tax on Overtime or Tips in NJ? What New Jersey Still Taxes in 2026

Federal vs New Jersey: the short answer

The One Big Beautiful Bill Act created three new federal deductions for tax years 2025 through 2028: overtime, tips and an extra deduction for people 65 and older. The IRS now calls the law the Working Families Tax Cuts.

New Jersey does not follow any of the three. The Division of Taxation's page says the state's Gross Income Tax has its own categories of income and deductions and “is not computed based on federal adjusted gross income.” Therefore, it says, “federal deductions under the federal OBBBA regarding overtime, tips, and senior citizens do not affect a taxpayer's New Jersey Individual Income Tax return.”

• The Division's page applies to residents (NJ-1040), nonresidents (NJ-1040NR) and estates and trusts (NJ-1041).
• The federal deductions do not make overtime or tips tax-free. The IRS says overtime is not excluded from gross income, and Social Security and Medicare tax still apply.
• The senior deduction phases out above $75,000 of modified adjusted gross income, or $150,000 for joint filers. New Jersey has its own age 65 exemption of $1,000.

What the federal overtime deduction covers

Only part of your overtime counts. The IRS defines qualified overtime as pay required by section 7 of the Fair Labor Standards Act (FLSA) that exceeds your regular rate. At time-and-a-half, that is the “half,” not the whole overtime check.

Overtime that only a state law or a union contract requires does not count. IRS Publication 6133 says amounts “not required by section 7 of the FLSA (e.g., due to state law or union contract) are not deductible.” If your employer pays double time, the IRS FAQs say only the half that meets the FLSA rule counts.

• Limit: up to $12,500 a year, or $25,000 on a joint return.
• You must be covered by the FLSA and not exempt from its overtime rule. The IRS points to the Department of Labor's FLSA fact sheets to check.
• You need a Social Security number valid for employment. Married workers must file jointly.
• You can claim it whether you itemize or take the standard deduction. It goes on Schedule 1-A, Part III.
• For 2026 and later, the IRS FAQs say you can only deduct qualified overtime your employer reports on Form W-2, box 12, code TT. The 2025 relief that allowed estimates is over.

What the federal tips deduction covers

Tips qualify only in an occupation the IRS lists as customarily receiving tips on or before December 31, 2024. The list is at IRS.gov/TippedOccupations, and Schedule 1-A tells you to check it.

Qualified tips are voluntary cash or charged tips from customers, including shared tips. They must be reported on a Form W-2, a Form 1099 or another statement, or by you on Form 4137.

• Limit: up to $25,000 a year. For the self-employed, the deduction cannot exceed net income from the business where the tips were earned.
• Self-employed people in a specified service trade or business under section 199A cannot claim it. Neither can employees whose employer is in one.
• Tips stay subject to Social Security and Medicare tax. The 2026 W-2 instructions say tips are still generally subject to federal income tax withholding too.
• It goes on Schedule 1-A, Part II. You need a valid Social Security number, and married people must file jointly.

How the $150,000 phase-out works

Both deductions shrink once your modified adjusted gross income (MAGI) passes $150,000, or $300,000 on a joint return. For most filers, MAGI is the adjusted gross income on Form 1040, line 11b.

The 2025 Schedule 1-A shows the method. Subtract the threshold from your MAGI and divide by $1,000. Drop any fraction, then multiply by $100. That amount comes off your capped deduction.

Our arithmetic on that method: a single filer with $10,000 of qualified overtime and $170,500 of MAGI is $20,500 over. That is 20 full steps of $100, so $2,000 comes off and the deduction is $8,000.

• A smaller deduction reaches zero sooner. $8,000 of overtime for a single filer is gone at $230,000 of MAGI.
• The deductions do not lower adjusted gross income. On the 2025 return, Schedule 1-A reads AGI from Form 1040, line 11b, and the IRS says its total goes on line 13b.
• New Jersey has no matching phase-out, because the deduction never reaches the NJ-1040.

Your 2026 W-2: codes TT and TP, and box 14b

For 2025, employers did not have to report overtime or tips separately, and many W-2s did not. Starting with 2026 pay, the IRS requires it, and Form W-2 has new spots for both.

The 2026 General Instructions for Forms W-2 and W-3 list three new entries. The code TT amount is the full qualified overtime paid. Your deductible amount is figured afterwards on Schedule 1-A.

• If an employer finds an error in code TT, the IRS FAQs say it must file a corrected Form W-2c. You cannot deduct more than the W-2 reports.
• Your qualified overtime stays in box 1 wages. Schedule 1-A asks for the overtime “included in Form W-2, box 1” and takes the deduction from there.

Worked example: the same overtime on both returns

Here is a hypothetical New Jersey resident, single, paid $30 an hour in 2026. The worker has 2,080 regular hours and 400 overtime hours at time-and-a-half, and no other income. The inputs are made up; the rates and limits come from the IRS and the Division.

Regular pay is $62,400 and overtime pay is $18,000, so W-2 wages are $80,400. The qualified overtime is the half: 400 hours × $15 = $6,000, shown in box 12, code TT. That is under the $12,500 cap, and MAGI is under $150,000, so the full $6,000 is deductible federally.

Our arithmetic, assuming no other adjustments or credits: federally, taxable income falls from $64,300 to $58,300, after the 2026 standard deduction of $16,100. Both amounts sit in the 22% bracket, so federal income tax falls by $1,320. On the NJ-1040, taxable income is $79,400 either way, after the $1,000 personal exemption, and New Jersey tax stays $2,931.53. Of that, $368.68 is the New Jersey tax on the $6,000 premium.

• Tips work the same way. Take a single server with $30,000 of wages and $20,000 of qualified tips. The deduction cuts federal income tax from $3,820 to $1,420, a $2,400 drop, because both amounts fall in the 12% bracket.
• On that server's NJ-1040, taxable income is $49,000 and New Jersey tax is $1,214.75 with or without the federal deduction. Our arithmetic puts $777.25 of it on the tips.
• New Jersey's rates are in the Division's Table A. The full brackets are in our NJ income tax brackets guide.

Both tables, with the multiply-and-subtract method, are in the NJ income tax brackets guide.

Why New Jersey does not follow the federal deduction

New Jersey does not start from a federal number. The Division says its Gross Income Tax has defined categories of income and deductions and is not computed from federal adjusted gross income. So a federal deduction has nothing to attach to.

The NJ-1040 instructions tell you to enter the total of State wages, salaries, tips, bonuses and commissions, using box 16 of your W-2, not federal wages. Overtime and tips are part of that total.

• There is no New Jersey line that subtracts qualified overtime, qualified tips or the federal senior deduction.
• The Division's OBBBA page points readers to its Exemptions and Deductions page for the state's own list.
• A worker who files a New Jersey nonresident return, the NJ-1040NR, is covered by the same statement.

Is New Jersey changing this? Bills to watch (checked October 31, 2026)

Several bills would give New Jersey its own break for overtime or tips. None is law. Each status below was read on the New Jersey Legislature's site on October 31, 2026.

• An introduced bill changes nothing on your return. Until a bill is enacted and applies to your tax year, plan on New Jersey taxing all of your overtime and tips.
• This page gives no dollar figures from these bills, because none is law.

When to bring in a CPA, and what to bring

A CPA is worth considering in a few cases. Your MAGI may be near the $150,000 or $300,000 line. You may have overtime from more than one employer. Your code TT may look wrong. Or you and a spouse may be weighing a joint return just to claim the deduction.

Whoever you hire, check the license in New Jersey's own record first. Then bring your W-2s, pay stubs that show overtime hours and rates, and last year's federal and New Jersey returns.

To confirm a CPA's license, status and any Board action, use the NJ CPA license lookup guide.

If you are self-employed and paying quarterly, the January 15, 2027 deadline is in the NJ estimated tax payments guide.

What you can still change before December 31, 2026 is in the tax planning services guide.

Questions to ask before acting.