New Tax Bill Deducts Overtime Pay and Tips, Caps Social Security Tax Starting 2026

The aptly named REAL AMERICA Act (Reward Each Americans Labor And Make Every Rich Individual Contribute Again Act) is a major tax overhaul that focuses on three big areas: boosting take-home pay for workers, protecting retirees, and changing how the wealthiest investment managers are taxed. If passed, most of these changes would kick in starting with the 2026 tax year.

More Money, Less Tax: The New Deductions

Starting in 2026, two new tax deductions are coming that directly impact the average worker. First, if you receive cash tips and report them to your employer (under section 6053(a)), you can now deduct that reported amount from your taxable income (Sec. 2). Second, the bill introduces a deduction for "qualified overtime compensation"—the extra pay you get above your normal rate, specifically required under the Fair Labor Standards Act (FLSA) (Sec. 4). This means that extra shift you picked up won't hit your tax bill as hard.

This is a big deal for everyone from restaurant servers to construction workers. Crucially, both of these new deductions are available even if you take the standard deduction, meaning you don't have to itemize to benefit. However, there’s a hard cap: if your Modified Adjusted Gross Income (MAGI) is over $450,000, you are completely excluded from claiming either the tip or the overtime deduction. This bill is clearly designed to funnel these specific benefits to middle and upper-middle-class workers, not the highest earners.

Ending the Tax on Social Security Benefits

For retirees, the biggest change is the repeal of Section 86 of the tax code, which currently taxes a portion of Social Security benefits. Starting in 2026, Social Security benefits would no longer be included in gross income and therefore would not be subject to federal income tax (Sec. 3). This means more money in the pockets of millions of retirees who rely on those checks.

But here’s the smart part: the bill explicitly addresses the concern that ending this tax would drain the Social Security trust funds. It mandates that the government must appropriate (backfill) money into the trust funds every year to exactly match the revenue lost from ending the tax (Sec. 3). This ensures the benefit to retirees doesn't come at the expense of the fund's solvency, a common sticking point in these debates.

Closing the Carried Interest Loophole (and Then Some)

Sections 5 and 6 tackle complex partnership taxation, primarily targeting high-income investment managers. Section 6 is the big one: it essentially reclassifies capital gains earned by partners who provide investment management services (like hedge fund managers) as ordinary income (Sec. 6). Since ordinary income is taxed at a much higher rate than capital gains, this change significantly increases the tax bill for these individuals.

For example, if you manage a private equity fund and earn a large capital gain on a successful sale, that gain would now be treated as regular income. The bill also specifies that when these partners sell their interest, the gain is immediately recognized as ordinary income. To prevent gaming the system, the bill imposes a 40% penalty on underpayments resulting from misapplying these complicated new rules (Sec. 6). This is a clear attempt to ensure high-earning financial professionals pay a higher tax rate on their performance fees.

Additionally, Section 5 changes how partnership interests received for services are valued for tax purposes. Instead of standard fair market value, the value is calculated based on what the partner would receive if the partnership immediately liquidated all its assets. Unless you actively opt out, you are automatically forced into paying taxes on that value in the year you receive the interest, rather than deferring it. This speeds up the tax timeline for those receiving partnership stakes as compensation.