January 2026

Tips, Overtime, and Taxes: What Income Really Lowers Your Tax Bill?

If you earned tips or overtime pay in 2025, you may qualify for newly introduced federal income tax deductions when you file your return. These deductions are available whether or not you itemize, but specific eligibility rules, income limits, and reporting requirements apply.

It’s also important to note that while these deductions can reduce federal income tax, the income may still be fully taxable for state and local income tax purposes. In addition, federal payroll taxes (Social Security and Medicare) continue to apply to any tips or overtime income you deduct.

Deducting Qualified Tips Income

Eligible taxpayers may deduct up to $25,000 per year in qualified tips income. This deduction begins to phase out once modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for married couples filing jointly) and is fully phased out at $400,000 ($550,000 for joint filers).

Qualified tips include amounts paid by customers in cash, by credit card, or distributed through tip-sharing arrangements. To qualify, the tips must be earned in an occupation designated by the IRS as one in which tipping is customary. Examples of eligible industries include:

• Beverage and food service

• Hospitality and guest services

• Personal appearance and wellness

• Transportation and delivery

Both employees and self-employed individuals may claim the tips deduction. However, individuals working in certain trades or businesses—such as health, law, accounting, financial services, or investment management—are not eligible.

Deducting Qualified Overtime Income

Eligible taxpayers may deduct up to $25,000 per year in qualified tips income. This deduction begins to phase out once modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for married couples filing jointly) and is fully phased out at $400,000 ($550,000 for joint filers).

Qualified overtime income is limited to overtime compensation required under Section 7 of the Fair Labor Standards Act, which generally mandates time-and-a-half pay for nonexempt workers. Only the additional “half” portion of overtime pay qualifies for the deduction.

Overtime premiums that are not required under Section 7—such as those mandated by state law or negotiated through union collective bargaining agreements—do not qualify.

Reporting and Documentation Requirements

Under the OBBBA, qualified tips income must be reported to both the worker and the IRS on Form W-2, Form 1099-NEC, or another approved information return or statement. Qualified overtime income must also be reported on Form W-2 or a similar IRS-approved form.

However, the IRS has announced that for the 2025 tax year, there will be no OBBBA-related changes to federal information returns, including Forms W-2, 1099, and 941. The IRS is providing transition relief for 2025 and expects to update reporting forms for the 2026 tax year.

Next Steps

Because eligibility, income thresholds, and reporting requirements can be complex, professional guidance is recommended. Contact the FinOpSys team to determine whether you qualify for one or both of these deductions and how to properly report them on your return.

Clean Energy Tax Incentives: Why Smart Businesses Are Acting Now

Although legislation enacted in 2025 extended or enhanced many business tax benefits, it also eliminated several clean energy incentives. The good news: businesses that act promptly may still be able to capture valuable clean energy tax breaks by moving projects forward in the first half of 2026.

Timing is critical, as eligibility for several incentives depends on when construction begins or when property is placed in service.

Energy-Efficient Building Improvements

The Section 179D deduction allows owners of new or existing commercial buildings to immediately deduct the cost of qualifying energy-efficient improvements, rather than depreciating those costs over the typical 39-year recovery period. To qualify, construction must begin by June 30, 2026.

The deduction applies to:

• New construction

• Building additions or renovations

• Commercial buildings of any size

• Multifamily residential rental buildings that are at least four stories above grade

Eligible improvements include depreciable property installed as part of:

• Interior lighting systems

• HVAC and hot water systems

• The building envelope

To qualify, the improvement must be part of a plan designed to reduce annual energy and power costs by at least 25% compared to applicable industry standards. This reduction must be certified by an independent contractor or licensed engineer.

For 2026, the base deduction is calculated on a sliding scale:

• $0.59 per square foot for projects achieving 25% energy savings

• Up to $1.19 per square foot for projects achieving 50% energy savings

Projects that meet prevailing wage and apprenticeship requirements qualify for enhanced bonus deductions. For 2026, these range from:

• $2.97 per square foot at 25% energy savings

• Up to $5.94 per square foot at 50% energy savings

Vehicle and Refueling-Related Tax Incentives

The Section 45W Qualified Commercial Clean Vehicle Credit remains available for vehicles acquired on or before September 30, 2025. If your business purchased eligible clean vehicles by that date, you may still be able to claim the credit on your 2025 tax return.

In addition, businesses still have time to install alternative fuel vehicle refueling property and claim the Section 30C credit for 2026. To qualify, the property must be placed in service by June 30, 2026.

Eligible property includes equipment that:

• Stores or dispenses clean-burning fuel

• Recharges electric vehicles

The credit is worth up to $100,000 per item, with each charging port, fuel dispenser, or storage unit treated as a separate item.

Act Soon

Other clean energy incentives may still be available if action is taken soon, including:

• Clean energy investment and production credits

• The advanced manufacturing production credit

These incentives often involve complex eligibility requirements and strict timing rules.

Sudden Windfall? Turn Unexpected Money Into Long-Term Financial Wins

An unexpected influx of money—whether from an inheritance, bonus, legal settlement, or lottery win—can be exciting and open up new possibilities. However, without a thoughtful strategy, that financial opportunity may not provide the long-term benefit you expect.

One of the biggest risks after receiving a windfall is acting too quickly. It’s easy to be tempted by major purchases, such as a dream home or luxury vehicle, that may not align with your broader financial picture. You may also feel pressure to give generously, only to later discover that some charitable requests were misleading or fraudulent. A practical first step is to place the funds in a secure bank or money market account as soon as they’re received. Giving yourself at least a month before making decisions can help you avoid impulse spending and costly missteps.

Taxes are another critical consideration. Some types of windfalls, including lottery winnings and certain legal settlements, are subject to federal income tax. In some cases, the additional income could push you into the highest federal tax bracket, where rates can reach 37%. State and local taxes may also apply. Working with a tax professional can help you understand your tax exposure and plan accordingly.

How you ultimately use your windfall should be guided by your overall financial situation and priorities. Paying down existing debt—especially high-interest debt that doesn’t offer a tax deduction—can be a smart early move. Strengthening or establishing an emergency fund can also reduce the likelihood of taking on future debt when unexpected expenses arise.

From there, it’s helpful to think long term. Consider where you want to be financially in five, 10, or 20 years, and develop a budget or financial plan that supports those goals. Whether you’re aiming for early retirement, launching a business, or increasing financial security, careful planning is essential. In most cases, even substantial windfalls aren’t sufficient to replace a lifetime of earned income, so major decisions—such as leaving your job—should be evaluated thoughtfully.

Finally, approach requests for money with caution. Friends, family members, or acquaintances may assume they should share in your good fortune or present investment opportunities that sound risk-free but aren’t. Before committing funds or making promises, seek professional guidance to ensure your decisions align with your long-term financial well-being.

What the 2026 Tax Law Changes Mean for You

Below is a snapshot of several significant tax law changes now in effect and worth factoring into your financial and tax planning for the year ahead.

• New charitable deduction for nonitemizers: Taxpayers who don’t itemize can now deduct cash charitable contributions of up to $1,000 ($2,000 for married couples filing jointly).

• New AGI floor for itemized charitable deductions: Itemizers may deduct charitable contributions only to the extent they exceed 0.5% of adjusted gross income, reducing the deductible amount for some taxpayers.

• Cap on itemized deduction benefits at top tax rate: Taxpayers in the 37% tax bracket are now subject to a 35% limit on the tax benefit of itemized deductions.

• Tighter alternative minimum tax rules: The AMT exemption phaseout thresholds have been lowered, and the phaseout now occurs at twice the rate used in 2025, potentially affecting more higher-income taxpayers.

• New tax-advantaged Trump accounts: A new type of tax-favored account has been introduced to benefit children under age 18, expanding long-term planning options for families.

• Expanded 529 plan flexibility: The tax-free withdrawal limit for qualified elementary and secondary school expenses has increased to $20,000 per year, up from $10,000 in 2025.

• Roth treatment for catch-up contributions: Higher-income taxpayers must now make catch-up contributions to employer-sponsored retirement plans as after-tax Roth contributions, changing both contribution strategy and future tax treatment.

• Elimination of certain homeowner energy credits: Some energy-efficiency tax credits for homeowners have been eliminated, reducing incentives for qualifying home upgrades.

• Expanded Section 199A QBI phase-in ranges: The income ranges over which QBI deduction limitations phase in have been widened, potentially allowing larger deductions for certain pass-through business owners.

• New minimum QBI deduction: Taxpayers who materially participate in an active trade or business may now claim a minimum QBI deduction of $400, provided they have at least $1,000 of qualified business income.

Big Write-Offs Ahead: Tax Advantages for Heavy Business Vehicles

Did your business purchase a “heavy” vehicle in 2025? If you bought an SUV, pickup, or van with a manufacturer’s gross vehicle weight rating (GVWR) of more than 6,000 pounds and used it more than 50% for business, the vehicle is treated as transportation equipment for tax purposes. As a result, the business-use portion of the purchase price may qualify for 100% first-year bonus depreciation, allowing you to deduct the full eligible cost upfront.

In addition to bonus depreciation, heavy business vehicles used more than 50% for business may also qualify for Section 179 expensing. However, for 2025, the maximum Section 179 deduction for vehicles with GVWRs between 6,001 and 14,000 pounds is generally limited to $31,300, which may cap the immediate write-off for higher-priced vehicles.

To take advantage of either of these tax benefits for the 2025 tax year, the vehicle must have been placed in service by December 31, 2025. Proper documentation of business use is essential to support the deduction and ensure compliance.

Casualty Loss Deductions: More Taxpayers May Now Qualify

Beginning in 2026, personal casualty loss deductions will no longer be limited solely to federally declared disasters. Under the new rules, certain state-declared disasters will also qualify, expanding potential relief for affected taxpayers.

For a state-declared disaster to be eligible, both the state governor (or the mayor of Washington, D.C.) and the U.S. Treasury Secretary must agree that the damage is severe enough to warrant application of these rules. This change means more taxpayers impacted by natural disasters, as well as fires, floods, or explosions—regardless of the underlying cause—may now be eligible to claim a deduction.

It’s important to note that taxpayers may still claim personal casualty losses that aren’t tied to either federally or state-declared disasters, but only to the extent of any personal casualty gains. As a result, careful documentation and professional guidance remain essential to determine eligibility and maximize available tax relief.

January Planning: The Key to a Strong Financial Year

January is more than just the start of a new calendar year—it’s a strategic reset for your business. The decisions you make this month can shape your financial performance for the entire year, which is why thoughtful January planning is the key to building a strong financial foundation.

This is the ideal time to review the prior year’s results with a clear lens. Finalizing your books, analyzing cash flow trends, and identifying what worked—and what didn’t—gives you valuable insight before new activity begins. With accurate numbers in hand, you can make informed decisions instead of relying on estimates or assumptions.

January planning also allows you to set realistic financial targets. Establishing revenue goals, expense budgets, and cash reserves early helps you manage growth intentionally and avoid surprises. It’s far easier to adjust course when you have benchmarks in place than to react midyear when options may be limited.

Tax planning is another major advantage of starting early. Many tax-saving strategies depend on timing, and waiting until year-end often means missed opportunities. Reviewing expected income, deductions, and upcoming deadlines in January allows you to proactively minimize your tax exposure and stay compliant throughout the year.

Beyond the numbers, January is the best time to align your financial strategy with your broader business goals. Whether you’re planning to hire, invest in new equipment, expand operations, or simply stabilize cash flow, early planning ensures your finances support those objectives instead of holding them back.

Businesses that invest time in January planning tend to operate with greater confidence and less stress. They know where they stand, what to watch, and when to act. A few focused hours at the beginning of the year can create clarity, control, and momentum that lasts well beyond January—setting the stage for a stronger, more successful financial year.