You will not have to pay extra in your taxes next year — at least not for some income types. Thanks to recent changes under the new 2025 tax law, there are kinds of income and deductions the IRS will leave untouched in the 2026 tax season. If you want to keep more of your money, this is something you should definitely pay attention to.
What income does the IRS not tax in 2026?
These are some of the income streams the IRS will not touch or will exempt under the 2025 tax law. This is goodnews because you get to save most of your money. Now lets have a look at some of the income streams that will be exempted:
- Qualified tip deductions — Eligible workers can deduct up to $25,000 in “qualified tips” from their taxable income.
- Overtime pay deductions — Workers can deduct up to $12,500 of eligible overtime pay from their taxable income.
- Roth account distributions — If your Roth IRA or Roth 401(k) is qualified, your withdrawals and earnings are tax-free.
- Life insurance death benefits — The money your beneficiaries receive from life insurance when you die is typically not taxed.
- Financial gifts — Gifts you receive are usually not taxed by the IRS (up to the federal gift tax exclusion).
- Inheritances — Federal law generally does not tax inheritances you receive.
- Employer-paid health benefits and HSA contributions — These remain tax-exempt when properly structured.
- Qualified HSA spending — Distributions used for medical expenses from an HSA are still tax-free.
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How do the tip and overtime deductions work?
This is a new development as you already know so there is still some certain aspects that are not very clear to the public especially on how the tips and deductions work. However, here is a bit of what I know:
- The tip deduction lets workers in tipped occupations remove up to $25,000 of tip income from what the IRS can tax. It phases out above certain income levels.
- The overtime deduction is for the extra half-time portion that is paid above normal pay (like time-and-a-half). Up to $12,500 of that extra portion can be deducted from taxable income.
These rules are active from 2025 through 2028 — so you’ll want to use them while you can.
What stays taxed despite these changes?
Even though many income types become safer, remember:
- You may still owe payroll taxes (Social Security, Medicare) on tip income, overtime, or wages.
- State and local taxes may still apply. Some states tax things the federal government does not.
- Interest, dividends, capital gains, and certain other investment income still face taxation under normal conditions.
- If you misuse or misreport qualifying amounts, you could lose the tax benefit or face penalties.
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Who benefits the most from these tax changes?
Here are the set of people that will benefit a lot more from these tax changes and if you are among any of these groups then you will be saving more of your money. You stand to gain more if:
- You earn a lot in tips or overtime.
- You regularly make Roth withdrawals under qualified conditions.
- You receive or give large gifts or inheritances.
- You already use HSAs or employer-paid health coverage.
Looking at the above groups more closely you’ll see that these tax changes lean in favor of middle and lower income workers more than they favor the very wealthy Americans because many of the new deductions phase out at higher incomes.
How to make sure you benefit next year
To make sure that you stand a chance at being among those that will benefit from this, here is what you need to do right away:
- Check if you qualify — review your income mix and whether your job allows tip or overtime deductions.
- Track your overtime and tips carefully — keep proof and records so you can claim them.
- Use Roth accounts wisely — leave money where it grows tax-free under qualified rules.
- Plan gifts or inheritances in a tax-smart way.
- Talk to a tax professional — these changes are new and have rules. You don’t want to miss something or make a mistake.
