The One Big Beautiful Bill Act created four new deductions for 2025 through 2028: qualified tips, qualified overtime pay, interest on certain car loans, and an enhanced deduction for people age 65 and older. They are claimed on a new form, Schedule 1-A, and you can take them whether you itemize or use the standard deduction. This guide covers the limits, the income phase-outs, who qualifies, and what changes for 2026. It also covers Trump accounts.
The four deductions at a glance
| Deduction | Maximum | Phase-out starts at MAGI (single / joint) | How it shrinks |
|---|---|---|---|
| Qualified tips | $25,000 per return | $150,000 / $300,000 | $100 less for each $1,000 over |
| Qualified overtime | $12,500 ($25,000 joint) | $150,000 / $300,000 | $100 less for each $1,000 over |
| Car loan interest | $10,000 per return | $100,000 / $200,000 | $200 less for each $1,000 over |
| Enhanced senior deduction | $6,000 per person | $75,000 / $150,000 | 6% of the excess over |
MAGI is your AGI, plus certain excluded foreign or Puerto Rico income. The deductions do not lower AGI; they are taken after it. If you are married, the tips, overtime and senior deductions require a joint return and a valid Social Security number (SSN) for the person who qualifies. A valid SSN here means one that is valid for employment and was issued before the return's due date, including extensions.
Qualified tips
You can deduct voluntary cash tips, including card payments and tips shared through a tip pool, received in an occupation that customarily and regularly received tips on or before December 31, 2024. The IRS's final regulations list more than 70 occupations grouped into eight categories, and the list is posted on the IRS website. Tips do not qualify if:
- the customer was not free to choose the amount, such as an automatic gratuity added to a party's bill without an option to change it;
- you work in a specified service trade or business as defined for the qualified business income deduction, although the IRS has issued transition rules for people in tipped occupations; or
- the tips were received for a service that is illegal under applicable law.
If you are self-employed, the deduction cannot be more than the net income of the business that earned the tips. Starting with 2026, employers report qualified tips in box 12 of Form W-2 (code TP) and the tipped occupation code in box 14b. For 2025, W-2 forms were not updated, so you can use tip logs, point-of-sale reports or payment platform records.
Qualified overtime
Only the premium part of overtime required by the federal Fair Labor Standards Act (FLSA) counts, generally the "half" in time-and-a-half. Pay above what the FLSA requires, holiday or weekend premiums without hours over 40, and overtime paid to FLSA-exempt employees such as many salaried professionals do not count. From 2026, employers must report qualified overtime in box 12 of Form W-2 (code TT), and after 2025 you can deduct only what is on the W-2. For 2025, the IRS provided transition relief. See Form W-4 withholding and tips and overtime reporting for employers.
Car loan interest
The loan must be originated after December 31, 2024, secured by a first lien, and used to buy a new vehicle for personal use. The vehicle must have final assembly in the United States and a gross vehicle weight rating under 14,000 pounds. Cars, minivans, vans, SUVs, pickups and motorcycles can qualify. Used vehicles, leases and business vehicles do not. You must put the vehicle identification number (VIN) on your return for every year you claim the deduction.
Enhanced senior deduction
For 2025, each person who was born before January 2, 1961 (age 65 by the end of the year) can deduct $6,000, up to $12,000 for a couple. For 2026 you must be age 65 by the end of the year. This is in addition to the extra standard deduction for being 65 or older. The deduction is added back for alternative minimum tax purposes.
Examples
Example 1: Luis and Ana file jointly with MAGI of $140,000. Luis earned $9,000 of qualified overtime premium and Ana earned $20,000 of qualified tips. Their deductions are $9,000 and $20,000, or $29,000 in total, since both are under the caps and below the phase-out. At a 22% federal bracket, that reduces federal income tax by roughly $6,400.
Example 2: Margaret, age 70, is single with MAGI of $85,000 in 2025. The senior deduction is reduced by 6% of the $10,000 over $75,000, or $600, so she deducts $5,400.
Trump accounts
A Trump account is a new type of individual retirement account for children. It is not a Roth, and contributions are not deductible. Key points from the law and the IRS:
- A child must be under 18 by the end of the year the account is elected and have an SSN.
- Contributions are limited to $5,000 per child per year (indexed after 2027), and none could be made before July 4, 2026. Employers can contribute up to $2,500 per employee or dependent, excluded from the employee's income.
- U.S. citizen children born from 2025 through 2028 may qualify for a one-time $1,000 federal pilot contribution, requested on Form 4547.
- Money must go into certain low-cost index funds, with no withdrawals until the year the child turns 18.
The IRS says Treasury is automatically enrolling eligible children starting October 1, 2026. You must still claim the account and elect the pilot contribution on Form 4547 to receive it.
State differences
Illinois starts from federal adjusted gross income, and these deductions are taken after AGI. Check the Illinois Department of Revenue for any Illinois treatment. See our Illinois guide.
How we can help
We check whether your W-2s and 1099s support the deduction, identify qualified occupations and vehicles, and prepare Schedule 1-A. If you have already filed without these items, we can review an amended return. See individual tax preparation or contact us.
Frequently asked questions
Do these deductions lower my payroll taxes?
No. They reduce income tax only. Social Security and Medicare taxes still apply to tips and overtime.
Can I claim the deductions if I use the standard deduction?
Yes. They are available whether you itemize or not.
What if I am married filing separately?
For tips, overtime and the senior deduction, married people must file jointly. Car loan interest does not have the joint-return requirement in the IRS instructions, but the other tests still apply.
Official sources
- IRS: Instructions for Form 1040 (2025), Schedule 1-A
- IRS: Schedule 1-A (Form 1040), Additional Deductions
- IRS: Questions and answers about the qualified overtime compensation deduction (FS-2026-13)
- IRS: Working Families Tax Cuts, Individuals and workers
- IRS: Trump Accounts
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.