The One Big Beautiful Bill Act (Public Law 119-21), signed on July 4, 2025, created four temporary federal deductions for tax years 2025 through 2028. They are claimed on a new form, Schedule 1-A (Form 1040). You can claim them whether you take the standard deduction or itemize.
This guide explains who qualifies for each deduction, how the caps and income phase-outs work, and the records you’ll need.
The four deductions at a glance
| Deduction | Maximum | Phase-out begins (single / joint) | Reduction |
|---|---|---|---|
| Qualified tips | $25,000 per return | $150,000 / $300,000 | $100 per $1,000 over |
| Qualified overtime | $12,500 / $25,000 joint | $150,000 / $300,000 | $100 per $1,000 over |
| Car loan interest | $10,000 per return | $100,000 / $200,000 | $200 per $1,000 (or part) over |
| Senior (65+) | $6,000 per qualifying person | $75,000 / $150,000 | 6% of the excess |
The phase-outs use modified adjusted gross income (MAGI). For most people, MAGI is the same as the adjusted gross income on line 11 of Form 1040.
1. No tax on tips
Who qualifies:
- Employees and self-employed people who receive qualified tips in an occupation that customarily and regularly received tips on or before December 31, 2024.
- The Treasury Department published the list of qualifying occupations. It includes food and beverage service, personal services such as hairstyling, hospitality, and many transportation and delivery jobs.
What counts:
- Voluntary cash tips, including tips paid by card or check and tips shared through a tip pool.
- Mandatory service charges and amounts the customer couldn’t decline don’t count.
Other rules:
- Married couples must file jointly.
- You need a valid Social Security number.
- For self-employed people, the deduction can’t exceed the net income from the business that earned the tips. Certain specified service businesses are excluded.
Records: your Form W-2 or 1099, and your tip reports to your employer (Form 4070). File Form 4137 for any unreported tips.
2. No tax on overtime
Who qualifies: employees who receive qualified overtime compensation, meaning overtime pay required by section 7 of the Fair Labor Standards Act.
What counts: only the premium portion. If you earn $30 an hour and $45 for each overtime hour, only $15 an hour counts.
What doesn’t count:
- Your regular rate of pay.
- Extra premiums required only by state law or a union contract, such as daily overtime or double time beyond the FLSA requirement.
Other rules:
- Exempt salaried employees, who aren’t owed FLSA overtime, can’t claim it.
- Married couples must file jointly.
Records: the qualified overtime amount reported by your employer. For 2025, the IRS gave transition relief, so pay stubs and employer statements can support the figure.
3. Car loan interest
Who qualifies: people who paid interest on a loan that meets all of these conditions:
- it was taken out after December 31, 2024;
- it was used to buy a new vehicle, meaning the original use starts with you;
- the vehicle had its final assembly in the United States;
- the vehicle is for personal use;
- the loan is secured by the vehicle.
Eligible vehicles include cars, minivans, vans, SUVs, pickups and motorcycles under 14,000 pounds gross vehicle weight rating.
What doesn’t count:
- Leases.
- Used vehicles.
- Business vehicles.
- Loans from related parties.
Records: the vehicle’s VIN, which must be reported on your return, and your lender’s statement of interest paid. The final assembly location appears on the vehicle’s window sticker and in NHTSA’s VIN decoder.
4. The senior deduction
Who qualifies:
- Each taxpayer who is 65 or older by the end of the tax year and has a valid Social Security number.
- A married couple where both spouses qualify can deduct up to $12,000.
- Married couples must file jointly.
How it interacts with other deductions: it’s in addition to the long-standing extra standard deduction for people 65 and older, and it’s available even if you itemize.
How the deductions work together
Each deduction has its own cap and phase-out, and they all stack. A restaurant server who also earns overtime and bought a qualifying new car could claim three of them. Add a fourth if they’re 65 or older.
Example. Sam and Jordan file jointly with $140,000 of AGI in 2026. Sam has $15,000 of qualified tips, Jordan has a $5,000 overtime premium, and they paid $2,800 of interest on a new U.S.-assembled SUV.
- Their MAGI is below every phase-out threshold, so all three deductions are allowed in full, $22,800 in total.
- Their taxable income falls from $107,800 to $85,000, saving about $3,436 in federal income tax.
Model your own mix with our Schedule 1-A calculator.
What these deductions don’t do
- They don’t reduce AGI. Amounts that depend on AGI or MAGI are unaffected: ACA premium tax credits, Medicare IRMAA, the taxable portion of Social Security, and many credits and state programs.
- They don’t reduce Social Security or Medicare payroll taxes on tips or overtime.
- They may not apply to state income tax. Each state decides whether to follow the federal change.
- They don’t change your withholding automatically. Update Form W-4 if you’d rather see the benefit in each paycheck than as a refund.
Deduction vs. savings
A deduction lowers taxable income, so the tax you save is about the deduction multiplied by your marginal rate. For most households that rate is 10%, 12%, 22% or 24%.
- At 12%, $10,000 of qualified tips saves about $1,200.
- At 22%, the same deduction saves about $2,200.
- If your taxable income is already zero, the deduction saves nothing.
That’s why our calculators run your numbers through the actual federal tax brackets.
Common mistakes to avoid
- Claiming the full overtime pay instead of just the premium. At time-and-a-half, the qualified amount is one-third of your total overtime pay.
- Assuming any car qualifies. Used cars, leases and vehicles assembled outside the U.S. don’t.
- Filing separately when married. That rules out the tips, overtime and senior deductions.
- Forgetting the timeline. Unless Congress extends them, 2028 is the last tax year for all four deductions.
Sources:
- IRS: One, Big, Beautiful Bill provisions
- Public Law 119-21 (H.R. 1)
- IRS forms and instructions
- Department of Labor: FLSA overtime
- NHTSA VIN decoder