For decades, smart money has been in the market. The capital gains were simply tax-saving income. But this tax season, your W-2 may collect more tax money than your earnings.
Recent tax law changes are closing the gap between federal income tax on wages versus investments — and in some cases, the check wins. Here is the reason.
The One Big Beautiful Bill Act (OBBBA) brings significant changes to the tax laws that reward workers, while leaving the federal tax rate for investors unchanged.
Tax breaks for overtime and tips for hourly workers
The new tax-free deduction for workers means more of their hard-earned money can be taxed.
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There is no tax on overtime: Individual filers can deduct up to $12,500 in overtime pay — that’s the “part” part of “time and a half.”
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There is no tax on tips: Service workers can deduct up to $25,000 in qualified tips.
However, “no tax” means no net worth tax, not tax, says Greg Monaco, CPA and founder of New Jersey-based Monaco CPA.
“FICA still applies to wages, tips, and overtime,” Monaco said. “Also, some states have not implemented these provisions – an employee may owe zero federal tax on overtime but face a 6% to 10% state income tax.
Both deductions also have a phase-out for those with adjusted adjusted gross income (AGI) of more than $150,000 ($300,000 for joint filers). But for eligible employees, benefits that would have been taxed at the marginal tax rate in 2024 are taxed at 0% in the 2025 tax year.
Read more: 4 ways the One Big Beautiful Bill Act can lower your tax bill
One standard deduction developed for all
It is common for the standard deduction to receive an annual inflation adjustment. However, in 2025, that increase was charged more.
For the 2025 tax season, single filers can claim a standard deduction of $15,750, up from $14,600 in 2024. That’s another $1,150 with a 0% income tax rate.
And if you’re age 65 or older, you can deduct an extra $6,000 on top of the standard deduction. This phase of improvement results in modified AGI over $75,000 ($150,000 for joint filers).
Read more: A relatively standard deduction. Itemizing: Which is right for you?
The child tax credit (CTC) reduces the income tax for families with qualifying children under 17 years of age. In 2024, eligible families may claim up to $2,000 per child. This rises to $2,200 by 2025.
There is also an additional bump in staff. The additional child tax credit (ACTC), the refundable part of the CTC, allows families with at least $2,500 in earned income to claim up to $1,700 of the credit as a refund.
Read more: Everything you need to know about the child tax credit
Workers have new tax protections, while investors are left with the status quo.
Capital gains tax brackets remain the same at 0%, 15%, or 20%. Income limits have risen slightly for inflation, but the changes are not comparable to the employee tax break.
To illustrate the extent of this change, Monaco compares a service worker earning $65,000 from base wages, eligible tips, and overtime to a filer with long-term cash benefits for the same salary.
“After the OBBB deduction, the next dollar of income is taxed at only 10 to 12% compared to an investor who pays an average of 15% on each additional dollar,” Monaco said. “This is a historic change: Ordinary income is now taxed at a lower rate than long-term capital gains.”
And there is still tax on investment income. High earners can still be hit with a 3.8% investment income tax (NIIT) on their investment income or the amount above the income limit, which is $200,000 for individual filers.
Here’s an example of how federal income tax can be higher on investment income than on the income of a single filer earning less than $150,000 in adjusted gross income.
| Tax impact | Income from tips | Income from qualified dividends |
|---|---|---|
| All “extra” income. | $5,000 | $5,000 |
| OBBBA deduction | $5,000 | $0 |
| Taxable amount | $0 | $5,000 |
| Limited corporate income tax bill | $0 | $750 (15% long-term capital gains tax) |
| The amount in your pocket after income tax | $5,000 | $4,250 |
The 2025 tax changes offer significant savings opportunities if you qualify. But because 2025 was a transition year, you will have to be your own advocate.
Here’s how to make sure you get the tax breaks you deserve.
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Double check your W-2s: Check your overtime pay (Box 1) or tips (Box 14) for 2025. If your employer hasn’t deducted those amounts, take your pay stubs to find the amount you can deduct.
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Complete the new IRS Schedule 1-A: This is the form required to claim new overtime pay and tips. You can get it directly from the IRS website or by using online tax software.
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Consider professional help: The OBBB Act added layers of complexity, including determining who qualifies, where it expires, and how to calculate the eligible amount. A tax professional can help you make sense of it all and avoid mistakes.
Read more: Free tax filing: How to file your 2025 taxes for free
Checks are taxed as ordinary income, at rates between 10% and 37%. Long-term investments (held for at least a year) are taxed at capital gains rates, either 0%, 15%, or 20%, depending on your income. However, the new deduction for employees could leave their effective tax rate lower than that of investors.
The tax rate on investments is not always high, but the taxable amount often is. For example, an employee may receive $5,000 in tips and take home more after federal income taxes than an investor who received $5,000 in dividends. However, FICA and state income taxes may apply to the wages.
The One Big Beautiful Bill Act increased the standard deduction, which means more of your income may be free from federal income tax. Hourly workers and those who receive tips have other deductions that can further reduce their taxable income. Taxes on investments remained unchanged under the new law.
