For decades, the smart money was in the market. Capital gains were simply a more tax-efficient income. But this tax season, your W-2 could garner more tax savings than your dividends.
Recent tax law changes are closing the gap between the federal income tax on paychecks versus investments — and in some cases, the paycheck wins out. Here’s why.
The One Big Beautiful Bill Act (OBBBA) brings significant changes to tax laws that reward workers, while federal tax rates for investors remain largely unchanged.
Tax breaks on overtime and tips for hourly workers
New deductions for non-exempt workers mean more of their hard-earned money can be income-tax-free.
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No tax on overtime: Individual filers can deduct up to $12,500 of the overtime premium — that’s the “half” portion of “time and a half.”
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No tax on tips: Service workers can deduct up to $25,000 in qualified tips.
However, “no tax” means no 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 haven’t adopted these provisions — a worker could owe zero federal tax on overtime but still face a 6% to 10% state income tax.”
Both deductions also have phase-outs for those with a modified adjusted gross income (AGI) over $150,000 ($300,000 for joint filers). But for eligible workers, earnings that would’ve been taxed at the marginal tax rate in 2024 are effectively taxed at 0% for tax year 2025.
Read more: 4 ways the One Big Beautiful Bill Act could lower your tax bill
One boosted standard deduction for all
It’s typical for the standard deduction to receive an annual inflation adjustment. However, in 2025, that increase was supercharged.
For the 2025 tax season, single filers can claim a $15,750 standard deduction, up from $14,600 for 2024. That’s an additional $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 boost phases out for a modified AGI over $75,000 ($150,000 for joint filers).
Learn more: Standard deduction vs. itemizing: Which is right for you?
The child tax credit (CTC) lowers the tax bill for families with qualified children under age 17. In 2024, eligible households could claim up to $2,000 per child. This increased to $2,200 for 2025.
There’s also an extra bump for workers. The additional child tax credit (ACTC), the refundable portion 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.
Learn more: Everything you need to know about the child tax credit
Workers have new tax shields, while investors were largely left with the status quo.
Capital gains tax brackets remain the same at 0%, 15%, or 20%. The income thresholds increased slightly for inflation, but the adjustments are no comparison to the tax breaks for workers.
To illustrate the magnitude of this change, Monaco compares a service worker earning $65,000 from base wages, qualified tips, and overtime to a filer with long-term capital gains at a similar income.
“After OBBB deductions, the worker’s next dollar of income is taxed at just 10 to 12% compared to the investor who pays a 15% rate on each extra dollar,” Monaco said. “This is a historic change: Ordinary earned income is now taxed at a lower marginal rate than long-term capital gains.”
And there’s still the surtax on investment income. High earners can still be hit with the 3.8% net investment income tax (NIIT) on their investment income or the amount above the income threshold, which is $200,000 for individual filers.
Here’s an example of how the federal income tax can be higher on investment income than earnings for a single filer earning less than $150,000 in modified 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 bill | $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 because 2025 was a transition year, you’ll have to be your own advocate.
Here’s how to ensure you get the tax break you deserve.
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Double-check your W-2s: Look for your income from overtime (Box 1) or tips (Box 14) for 2025. If your employer didn’t break out those amounts, grab your pay stubs for the amount you can deduct.
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Complete the new IRS Schedule 1-A: This is the form needed to claim the new overtime and tip deductions. You can find it directly on the IRS website or by using online tax software.
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Consider the help of a professional: The OBBB law added layers of complexity, including determining who qualifies, when it phases out, and even how to calculate the eligible amount. A tax professional can help you make sense of it all and avoid errors.
Learn more: Free tax filing: How to file your 2025 taxes for free
Paychecks are taxed as ordinary income, with rates between 10% and 37%. Long-term investments (held at least a year) are taxed at the capital gains rates, either 0%, 15%, or 20%, depending on your income. However, new deductions for workers could leave their effective federal income tax rate lower than that of investors.
The tax rate on investments isn’t always higher, but the taxable amount often is. For example, a worker can earn $5,000 in tips and take home more after the federal income tax than an investor who received $5,000 in dividends. However, FICA and state income taxes may still apply to paychecks.
The One Big Beautiful Bill Act increased the standard deduction, which means more of your earnings could be free from federal income tax. Hourly workers and those who receive tips have additional deductions that can further lower their taxable income. Taxes on investments remained largely unchanged by the new law.
