OBBB Tax Deductions for Tips, Overtime, and Seniors: Why Most Expats Can’t Use Them
The One Big Beautiful Bill Act (OBBB) created three new deductions for 2025-2028: no tax on qualified tips (up to $25,000), no tax on qualified overtime pay (up to $25,000 MFJ), and an enhanced senior deduction ($6,000 for taxpayers 65+). All three sound like good news, but most American expats working abroad cannot use the tips or overtime deductions because they require U.S.-compliant employer reporting (W-2 tip designation and FLSA-covered overtime) that foreign employers don’t provide.
According to the IRS, tips must be reported in a qualifying occupation and properly designated on a U.S. tax form. The overtime deduction requires wages covered by the Fair Labor Standards Act. For Americans working for foreign employers, neither condition is met. The better news for expats:
- FEIE: Excludes up to $130,000 (2025) of ALL foreign earned income, including tips and overtime, not just $25,000
- FTC: Dollar-for-dollar credit for foreign taxes paid often eliminates U.S. tax entirely
- Senior deduction: This one CAN apply to expat retirees, but MAGI includes FEIE-excluded income, which may phase it out
Here’s why each OBBB deduction falls short for expats, and which existing protections give you better results.
Not sure whether you can claim the new tips deduction as an expat?
What Is the New Tax Deduction on Tips?
The One Big Beautiful Bill Act (OBBB), signed into law in July 2025 as part of broader tax reform, created a temporary deduction for qualified tips received during tax years 2025 through 2028. This legislation also permanently extended the Tax Cuts and Jobs Act and increased the Foreign Earned Income Exclusion to $130,000 for the 2025 tax year.
Service workers in the U.S. can deduct up to $25,000 annually in tips, with the deduction phasing out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
Qualifying occupations include restaurant servers, bartenders, hotel staff, hairdressers, taxi drivers, and similar service positions that customarily and regularly receive tips on or before December 31, 2024.
Recent guidance: On November 21, 2025, the IRS released Notice 2025-69, providing detailed guidance for individual taxpayers on calculating and claiming the tips deduction for the 2025 tax year. Since the 2025 Form W-2 and Form 1099 won’t be updated to separately report tips until 2026, the notice explains alternative methods employees can use to determine their qualified tip amounts.
The critical requirement: Tips must be reported on information returns, such as Forms W-2 and 1099, and employers must comply with IRS tip-reporting requirements.
Does the Fair Labor Standards Act (FLSA) Affect the New Tip or Overtime Deductions for Expats?
The One Big Beautiful Bill Act created two separate tax deductions for service workers beginning in the 2025 tax year:
- A tips deduction for qualified cash tips (up to $25,000)
- An overtime deduction for qualified overtime pay
These two deductions operate differently when it comes to the Fair Labor Standards Act (FLSA):
Tips Deduction: Not Tied to FLSA Coverage
To claim the tips deduction, the IRS requires that:
- Your tips come from an occupation that customarily and regularly received tips on or before December 31, 2024
- Your tips are properly reported on U.S. tax forms (W-2, certain 1099s, or Form 4137)
- The employer/payor tracks and reports tips separately (and beginning in 2026, reports the tipped occupation on information returns)
Because most expats working for foreign employers do not receive U.S. W-2s or 1099s and do not have tips reported under U.S. payroll rules, the deduction is typically not available even though the tips are still taxable U.S. income and must be reported.
Overtime Deduction: Is Tied to FLSA Coverage
The separate overtime deduction in OBBB is linked directly to section 7 of the Fair Labor Standards Act.
The FLSA does not apply to work performed entirely in a foreign country, which means overtime worked abroad generally cannot qualify for the new overtime deduction.
What This Means for Expats
- The tips deduction isn’t usually available because foreign employers don’t provide the U.S. reporting required to calculate and substantiate “qualified tips”
- The overtime deduction almost never applies because it is tied to the FLSA, which does not cover work performed abroad
- Most expat service workers get far greater benefit by using the Foreign Earned Income Exclusion, which excludes wages and tips from U.S. taxation without requiring special tip documentation from a foreign employer
Real-world example: Sarah works as a server in London earning £35,000 annually (including tips). Her UK employer provides pay statements under UK law but doesn’t issue U.S. W-2 forms or track tips separately for IRS purposes. Even though Sarah must report her worldwide income to the IRS, she likely won’t qualify for the tips deduction because she lacks the required U.S. tax form documentation. However, using the Foreign Earned Income Exclusion, she can exclude her entire income and owe $0 in U.S. taxes without needing special tip documentation.
How Can I Exclude My Tips from U.S. Taxes?
The Foreign Earned Income Exclusion was specifically designed for Americans working abroad and provides far superior tax relief for service workers.
Why FEIE works better: The FEIE excludes up to $130,000 of your entire foreign-earned income (including both wages and tips) from U.S. taxation without requiring detailed U.S.-compliant tip documentation from your foreign employer.
To qualify, you must meet one of two tests:
Physical Presence Test: Be physically present in a foreign country or countries for at least 330 full days during any 12-month period. This works perfectly for servers and bartenders living abroad.
Bona Fide Residence Test: Establish genuine residency in a foreign country for a full calendar year (January 1 to December 31). This works well for expats who’ve made another country their permanent home.
FEIE vs. tips deduction example:
Maria bartends in Dublin earning $45,000 annually (including $12,000 in tips). She pays $8,500 in Irish taxes and qualifies under the Physical Presence Test.
- With tips deduction (if it applied): Deduct $12,000 in tips, leaving $33,000 taxable = approximately $2,500 owed in U.S. taxes
- With FEIE (what actually works): Excludes entire $45,000 income = $0 owed in U.S. taxes
Maria saves $2,500 using FEIE without needing special tip documentation.
Do I Need to Report My Tips to the IRS?
Yes. Even though you’ll likely owe $0 after applying FEIE, you must report all worldwide income, including tips.
How to Report Tips as an Expat:
- Convert foreign currency tips to USD
- Report total income (wages plus tips) on your U.S. tax return
- File Form 2555 to claim the Foreign Earned Income Exclusion
- FEIE excludes your income, reducing your U.S. tax liability to $0
You must file Form 2555 to claim the exclusion. Not filing means no FEIE benefits and potential penalties.
Should I Use FEIE or Foreign Tax Credit?
For service workers abroad, the choice depends on where you work and how much you earn.
Use FEIE when:
- You work in low-tax or no-tax countries (UAE, Qatar, Monaco)
- Your total income is below $130,000
- You want to simplify your tax filing process
Use Foreign Tax Credit when:
- You work in high-tax countries (Germany, France, the UK, Australia)
- Your income exceeds $130,000
- You’ve paid substantial foreign taxes
For most service workers, the FEIE provides the simplest and most effective tax relief, as hospitality wages typically fall well below the $130,000 exclusion limit.
What About Other Trump Tax Policy Changes for Expats?
The One Big Beautiful Bill Act that created the tips deduction also brought significant benefits for American expats:
FEIE Increased to $130,000: For the 2025 tax year, the Foreign Earned Income Exclusion rose from $126,500 to $130,000, with further increases to $132,900 for the 2026 tax year.
Tax Cuts and Jobs Act Made Permanent: The TCJA provisions, which were set to expire on December 31, 2025, have been made permanent, providing long-term tax rate certainty.
Double Taxation Relief Proposed: President Trump has expressed support for eliminating double taxation for Americans abroad, with legislation such as the Tax Fairness for Americans Abroad Act gaining momentum in Congress.
Section 899 Removed: The “revenge tax” provision that penalized certain foreign investments was eliminated.
While the tips deduction itself doesn’t benefit most expats, the OBBB Act’s increased FEIE and other provisions deliver substantial tax relief for Americans working abroad.
How Greenback Helps Service Workers Abroad
Greenback is an American company founded in 2009 by U.S. expats for expats. Many of our CPAs and Enrolled Agents are expats themselves living in 14 time zones, so they experience firsthand the challenges of living abroad and have the knowledge and patience to help you navigate the complicated U.S. tax system.
No matter how late, messy, or complex your return may be, we can help. You’ll have peace of mind knowing your taxes were done right using strategies designed specifically for Americans abroad.
If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.
Want peace of mind that your tips and wages are reported accurately?
This article provides general information for educational purposes. Individual tax situations vary, and you should consult with a qualified tax professional for advice specific to your circumstances. Tax laws and regulations change frequently, and the information in this article reflects current law as of the publication date.
Related Resources
Tax Deductions and FEIE
- Foreign Earned Income Exclusion: How to Save on Taxes Abroad
- Physical Presence Test Guide
- Bona Fide Residence Test Explained
- Filing Form 2555 for FEIE
- FEIE vs FTC: Which Strategy Saves You More?
- Foreign Tax Credit Guide
Trump Tax Policies and Expat Tax Reform
- Trump’s 2025 Tax Policies: What U.S. Expats Need to Know
- Trump’s Double Taxation Proposal: What Expats Need to Know
- Trump Income Tax Proposal: What It Would Mean for Expats
- Tax Fairness for Americans Abroad Act Explained
- Potential U.S. Tax Policy Changes Under Trump
- IRS 2026 Tax Inflation Adjustments: FEIE Increases to $132,900
Filing Requirements and Compliance
