For decades, smart money has been in the market. Capital gains were simply tax-efficient income. But this tax season, your W-2 could yield more tax savings than your contributions.
Recent tax law changes are closing the gap between federal income tax on investments versus wages — and in some cases, wages. Here’s why.
The One Big Beautiful Bill Act (OBBBA) makes significant changes to tax laws that reward workers, while also changing federal tax rates for investors.
Overtime tax breaks and guidelines for hourly workers
New deductions for non-exempt workers mean more of their earnings can be deducted from their income.
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There is no tax on overtime: Individual filers can deduct up to $12,500 in overtime premiums—that is, the “time-half” portion.
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There is no tax on tips: Service employees can deduct up to $25,000 in qualified tips.
However, “no tax” is meaningless income Tax, not tax-free, said 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 adopted this provision – a worker can pay zero federal tax on overtime but still face a 6% to 10% state income tax.”
Both deductions also have phase-outs for those with adjusted adjusted gross income (AGI) over $150,000 ($300,000 for joint filers). But for eligible employees, earnings that would have been taxed at the marginal tax rate in 2024 are effectively taxed at 0% for the 2025 tax year.
Read more: 4 Ways A Big Beautiful Bill Can Lower Your Tax Bill
An enhanced standard deduction for all
It is common for the standard deduction to receive an annual inflation adjustment. However, in 2025, this increase is much higher.
For the 2025 tax season, single filers can claim a standard deduction of $15,750, up from $14,600 for 2024. That’s an additional $1,150 with a 0% income tax rate.
And if you’re 65 or older, you can deduct an additional $6,000 on top of the standard deduction. This increase is phased out for modified AGI from $75,000 ($150,000 for joint filers).
learn more: Itemized vs. Standard Deduction: Which Is Right for You?
Child Tax Credit (CTC) reduces the tax bill for families with children under the age of 17. In 2024, eligible families can claim up to $2,000 per child. It increased to $2,200 by 2025.
There is also an additional sink for workers. The Additional Child Tax Credit (ACTC), the refundable portion of the CTC, allows families with an income of at least $2,500 to claim a credit of up to $1,700 as a refund.
learn more: Everything you need to know about the child tax credit
Workers have new tax shelters, while investors are largely left with the status quo.
Capital gains taxes remain the same at 0%, 15%, or 20%. Income thresholds have increased slightly for inflation, but the adjustments are not comparable to tax breaks for workers.
To illustrate the extent of this change, Monaco compares a service worker earning $65,000 from base salary, eligible tips, and overtime to a filer with long-term capital gains on the same income.
“After OBBB deductions, a worker’s next dollar of income is taxed at only 10 to 12% compared to investors who pay a 15% rate on each additional dollar,” Monaco said. Monaco said. “This is a historic change: ordinary earned income is now taxed at a lower rate than long-term capital gains.”
And there is still an additional tax on investment income. High earners can still hit the 3.8% net investment income tax (NIIT) on their investment income or amounts above the income threshold, which is $200,000 for individual filers.
Here’s an example of how federal income tax on investment income can be higher than income for a single filer earning less than $150,000 in adjusted gross income.
| Tax impact | Income from tips | Income from qualified dividends |
|---|---|---|
| Gross “extra” income | $5,000 | $5,000 |
| OBBBA deduction | $5,000 | $0 |
| Taxable amount | $0 | $5,000 |
| Estimated federal income tax | $0 | $750 (15% long-term capital gains tax) |
| Total in your pocket after income tax | $5,000 | $4,250 |
The 2025 tax changes offer opportunities for significant savings if you qualify. But since 2025 was a transition year, you must be your own advocate.
Here’s how to make sure you get the tax break you deserve.
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Double check your W-2s: Look at your earnings from overtime (box 1) or tips (box 14) for 2025. If your employer doesn’t deduct this amount, take your paychecks for 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 and tip deductions. You can find this directly on 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, when that phase ends, and even how to calculate the qualifying amount. A tax professional can help you understand all of this and avoid mistakes.
learn more: Free Tax Filing: How to file your 2025 taxes for free
Cashier’s checks are taxed as ordinary income, at rates between 10% and 37%. Long-term investments (held for at least one year) are taxed at capital gains rates, either 0%, 15%, or 20%, depending on your income. However, the new deductions for employees could leave their effective federal income taxes lower than those of investors.
The tax rate on investments is not always high, but the taxable amount often is. For example, a worker can earn $5,000 in tips and buy more home after federal income tax than an investor who earned $5,000 in dividends. However, FICA and state income taxes may still apply to wages.
A big beautiful bill increased the standard deduction, meaning more of your earnings could be exempt from federal income tax. Hourly workers and those who receive tips have additional deductions that can further reduce their taxable income. Taxes on investments remain largely unchanged by the new law.
