How the tips and overtime tax deductions in the One Big Beautiful Bill Act affect American expats

Critical limitations for American expats

Limited applicability to foreign employment

The tips and overtime deductions face significant practical limitations for expats:

1. FLSA Jurisdiction Issues: The overtime deduction only applies to compensation required by the Fair Labor Standards Act. The FLSA primarily governs employment within the United States, raising questions about whether overtime worked abroad by US citizens for foreign employers would qualify.
2. Tips in Traditional Occupations: The Treasury Secretary must release a list of qualifying tipped occupations within 90 days of enactment, based on industries that customarily received tips as of December 31, 2024. This list will likely focus on US-based service industries, potentially excluding local tipping customs in foreign countries.

Interaction with Foreign Earned Income Exclusion (FEIE)

American expats commonly use the Foreign Earned Income Exclusion to exclude up to $130,000 of foreign-earned income for 2025. A critical consideration is how these new deductions interact with FEIE:

• If expats exclude their foreign wages under FEIE, the same income likely cannot also qualify for the tips or overtime deductions.
• The FEIE remains unchanged under the new legislation, so existing tax planning strategies continue to apply.
• Expats earning above the FEIE threshold may benefit more from these deductions if their tips or overtime qualify.

Reporting and compliance burdens

Employers must report qualified overtime compensation and tips as separate line items on Form W-2 for employees or appropriate Forms 1099 for non-employees. For expats, this creates additional complexity:

1. Foreign employers may not be familiar with US reporting requirements.
2. For 2025, employers can use "any reasonable method" to approximate qualified amounts, but this transition rule may not help foreign employers.
3. Additional documentation requirements may burden expats and their foreign employers.

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Practical impact for different expat scenarios

Scenario 1: Expat working for a US company abroad

An American working for a US multinational corporation in London who receives overtime pay may potentially qualify for the overtime deduction if the employment relationship remains subject to US labor laws.

The employer must properly report qualified overtime on Form W-2. The expat’s total income must also fall within the phase-out thresholds. When these conditions are met – and documented correctly – the deduction may be available.

Scenario 2: Expat in the service industry abroad

An American bartender working in Dublin may face challenges accessing the tips deduction because:

• Irish tipping customs may not align with the US "traditional" tipped occupations.
• The foreign employer likely won't issue US tax forms.
• Local employment laws, not US laws, govern the work relationship.

Scenario 3: Self-employed expat

Self-employed Americans abroad generally cannot benefit from these deductions because the overtime deduction requires an employer–employee relationship under the Fair Labor Standards Act.

Additionally, self-employment income does not typically qualify as "tips" in the traditional sense. As a result, these tax breaks are usually unavailable to those who work for themselves.

Tax compliance considerations

Federal vs. payroll taxes

Both deductions apply only to federal income taxes. Workers and employers remain responsible for Social Security and Medicare taxes on qualified tips and overtime. For expats, this means:

• Social Security totalization agreements remain important.
• Self-employment tax obligations continue for qualifying expats.

State tax implications

The deductions don't affect state or local taxes. Expats with ongoing state tax obligations should consider whether their former state of residence recognizes these federal deductions, as well as the potential state-level tax planning opportunities.

Strategic recommendations for expats

1. Evaluate current tax strategy: Expats should work with qualified tax professionals to

• analyze whether these deductions provide greater benefits than FEIE
• consider the interaction between various expat tax benefits
• plan for the temporary nature of these deductions (expiring after 2028)

2. Documentation and record-keeping: Given the complexity of proving qualification for these deductions while abroad, expats should maintain detailed records of tips and overtime income, understand local employment law implications, and ensure proper communication with employers about US reporting requirements.

3. Monitor regulatory guidance: The Treasury Department will issue guidance on reasonable methods for 2025 and updates to tax forms and processes. Expats should stay informed about:

• official lists of qualifying tipped occupations
• clarifications on foreign employment applicability
• updated tax forms and filing procedures

Your action plan: Maximize or move on

The tips and overtime tax deductions in the One Big Beautiful Bill Act offer potentially valuable tax relief, but their benefits for American expats are limited by jurisdictional issues, reporting complexities, and the unchanged nature of citizenship-based taxation.

Expats working in qualifying situations may find some benefit, particularly those employed by US companies abroad or in higher income brackets where FEIE provides less value.

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