Investments compared to your salary: Reasons why net income is more beneficial for employees during this tax season

Why Your Paycheck May Now Offer Bigger Tax Savings Than Investments

For years, investors enjoyed more favorable tax treatment compared to wage earners. Capital gains were often taxed less than regular income. However, recent changes to tax laws are shifting this balance, and in some cases, your salary could now provide greater tax advantages than your investment returns. Here’s what’s changed.

Major Tax Relief for Workers Under the One Big Beautiful Bill Act

The One Big Beautiful Bill Act (OBBBA) has introduced sweeping tax reforms that primarily benefit employees, while tax rates for investors have seen little to no change.

New Deductions for Hourly Employees: Overtime and Tips

Hourly workers now have access to new deductions, allowing them to keep more of their earnings free from federal income tax:

• Overtime Exemption: Individuals can now deduct up to $12,500 of their overtime premium pay (the “half” in “time and a half”).
• Tip Income Deduction: Service industry employees can deduct as much as $25,000 in eligible tips.

It’s important to note, as Greg Monaco, CPA, points out, that these deductions apply only to federal income tax—FICA taxes still apply, and some states may not recognize these new provisions. So, while you might owe no federal tax on overtime, state taxes could still range from 6% to 10%.

These deductions begin to phase out for those with a modified adjusted gross income above $150,000 (or $300,000 for joint filers). For those who qualify, income that would have been taxed at your marginal rate in 2024 could be taxed at 0% for 2025.

Standard Deduction Gets a Significant Boost

While the standard deduction typically rises with inflation, 2025 brings a much larger increase. Single filers can now claim a $15,750 standard deduction, up from $14,600 in 2024—a $1,150 jump that’s not taxed at all. Those aged 65 or older can deduct an additional $6,000, though this extra benefit phases out for incomes above $75,000 ($150,000 for joint filers).

Increased Child Tax Credit for Working Families

Families with children under 17 can now claim a higher child tax credit—up to $2,200 per child in 2025 (up from $2,000 in 2024). Additionally, the refundable portion (the Additional Child Tax Credit) allows families with at least $2,500 in earned income to receive up to $1,700 as a refund.

Investors See Little Change While Workers Benefit

While employees are enjoying new tax breaks, investors are largely unaffected by the recent reforms. Capital gains tax rates remain at 0%, 15%, or 20%, with only minor adjustments for inflation—nothing close to the benefits workers are receiving.

To highlight the impact, Greg Monaco compares a service worker earning $65,000 from wages, tips, and overtime to an investor with the same income from long-term capital gains. After applying the new deductions, the worker’s next dollar is taxed at just 10–12%, while the investor pays 15% on each additional dollar. This marks a historic shift, with earned income now potentially taxed at a lower marginal rate than long-term capital gains.

High earners should also remember the 3.8% Net Investment Income Tax (NIIT) still applies to investment income above $200,000 for individuals.

Comparing Taxes: $5,000 in Tips vs. $5,000 in Dividends

Here’s a side-by-side look at how federal income tax can be lower on earnings than on investment income for a single filer with less than $150,000 in modified AGI:

Tips for Maximizing Your Tax Savings in 2025

The 2025 tax changes can lead to substantial savings for those who qualify, but you’ll need to be proactive to take full advantage. Here’s how to make sure you don’t miss out:

• Review your W-2s: Check for overtime (Box 1) and tips (Box 14) on your 2025 W-2. If these aren’t listed separately, use your pay stubs to determine deductible amounts.
• File the new IRS Schedule 1-A: This form is required to claim the new overtime and tip deductions. You can find it on the IRS website or through tax software.
• Consult a tax professional: The OBBBA has added complexity to the tax code. A professional can help you determine eligibility, phase-outs, and ensure you claim the correct deductions.

Frequently Asked Questions: Paycheck vs. Investment Taxes

How do tax rates compare for wages and investments?

Wages are taxed as ordinary income, with rates ranging from 10% to 37%. Long-term investments held for at least a year are taxed at 0%, 15%, or 20%, depending on your income. However, new deductions for workers may result in a lower effective federal tax rate for employees than for investors.

Are taxes on investment income higher?

Investment tax rates aren’t always higher, but the amount subject to tax can be. For instance, a worker earning $5,000 in tips could keep more after federal income tax than an investor receiving $5,000 in dividends. Remember, FICA and state taxes may still apply to wages.

How does the OBBBA impact my taxes?

The OBBBA increased the standard deduction, making it possible for more of your earnings to be exempt from federal income tax. Hourly workers and those who receive tips benefit from additional deductions, while taxes on investments remain largely unchanged.