OBBBA Tax Deductions Explained (2025–2028)
The One Big Beautiful Bill Act, signed July 4, 2025, created four new federal income tax deductions available through 2028. Here's what each one covers, who qualifies, and how much you can save.
Quick Comparison Table
| Deduction | Max Amount | Phase-Out (Single) | Phase-Out (MFJ) | Key Requirement |
|---|---|---|---|---|
| Overtime | $12,500 / $25,000 | $150K–$275K | $300K–$550K | W-2, only FLSA premium 0.5× |
| Tips | $25,000 | $150K–$400K | $300K–$550K | W-2 or self-employed, Treasury occupation list |
| Car Loan | $10,000 | $100K–$150K | $200K–$250K | New vehicle, US-assembled |
| Senior Bonus | $6,000 / person | $75K–$175K (6% per $) | $150K–$250K | Age 65+, joint return if married |
Tips phase out at $100 per $1,000 of MAGI above the threshold, so a single filer with the full $25,000 tip cap loses it $250,000 above the threshold, at $400,000 MAGI. Overtime has the same $100 step-down but a smaller single cap ($12,500), so a capped single filer hits zero at $275,000. The senior deduction works differently — a straight 6% of every dollar over the threshold.
No Tax on Overtime →
Only the premium portion of overtime pay (the extra 0.5× above your regular rate, required by the FLSA) is deductible. If you earn $25/hour and work at time-and-a-half ($37.50), only the extra $12.50/hour counts. Maximum $12,500 for single filers, $25,000 for married filing jointly. The deduction steps down $100 per $1,000 of MAGI above $150K (single) / $300K (MFJ) — a capped single filer reaches zero at $275K. Overtime is W-2 only — self-employed and 1099 contractors do not qualify, with one narrow exception: a worker who is an employee under FLSA rules but a contractor for tax purposes reports on Form 1099 (box 14 MISC / box 1d NEC) instead.
No Tax on Tips →
Up to $25,000 of qualified tip income is deductible for workers in occupations that customarily received tips on or before December 31, 2024 — the statute froze the qualifying occupation list as of that date. Unlike overtime, the self-employed can claim it, limited to the net income of the tipped business. Same $100-per-$1,000 step-down and $150K/$300K thresholds as overtime; because the cap is $25,000, a single filer with the full cap keeps a partial deduction out to $400K MAGI. Only tips reported to your employer (or on Form 4137) count — cash tips you never reported were never taxed in the first place and get no benefit. Mandatory service charges (autograt) are wages, not tips, and do not qualify.
No Tax on Car Loan Interest →
Up to $10,000 of interest paid on loans for new, US-assembled vehicles. Different income limits from overtime/tips: phase-out at $100K–$150K (single) or $200K–$250K (MFJ), with the steepest step-down of the four — $200 of deduction lost per $1,000 of MAGI above the threshold. Check your VIN to confirm the vehicle was assembled in the United States, and note the loan must have been issued after December 31, 2024 on a vehicle first used by you in that year.
Senior Bonus Deduction →
A $6,000 deduction per person aged 65 or older — $12,000 for a couple where both qualify. This is not a Social Security tax exemption; benefit taxation rules are unchanged. It phases out at 6% of MAGI above $75K (single) or $150K (joint), reaching zero at $175K and $250K. Married taxpayers must file jointly to claim it, each qualifying person needs a valid SSN, and dependents cannot claim it. Available whether you itemize or take the standard deduction.
How to Claim These Deductions
All four deductions are figured on IRS Schedule 1-A, and the total flows to line 13b of Form 1040/1040-SR, starting with tax year 2025. Key points:
- • These are deductions (reduce taxable income), not tax credits
- • They reduce federal income tax only — FICA (Social Security & Medicare) still applies in full
- • You can claim them whether you itemize or take the standard deduction
- • State conformity varies — many states have not conformed; California and Pennsylvania tax the income normally
- • The deductions expire after tax year 2028 unless extended by Congress
The W-2 Reporting Change (2025 vs 2026)
For tax year 2025, the IRS granted transition relief (Notice 2025-69): W-2s look normal, and employees figure the overtime and tips deductions from their own pay stubs and tip logs. That relief does not extend to 2026.
- • Box 12 code TT — total qualified overtime compensation (premium portion only)
- • Box 12 code TP — total cash tips reported to the employer
- • Box 14b — Treasury tipped occupation code (code "000" means the tips do not qualify)
Starting with 2026 W-2s (issued January–February 2027), you can only deduct overtime and tips that actually appear in those boxes. If your employer understates the amount, you need a corrected W-2c from them — the IRS has ruled that a substitute Form 4852 cannot be used to claim additional overtime. Full details on our W-2 reporting guide.
Official Sources
- • IRC §§224 (tips), 225 (overtime), 70204 (car loan), 151(d)(5) (seniors) — statute text
- • Schedule 1-A (Form 1040) and instructions — the line-by-line math our calculators implement
- • IRS Notice 2025-69 (2025 transition relief) and FS-2026-13 (2026 W-2 reporting Q&A)
- • IRS Publication 6142 (senior deduction)
Frequently Asked Questions
Are these deductions or credits?
Deductions. They reduce your taxable income; the tax saved equals the deduction times your marginal bracket. A $12,500 overtime deduction saves $2,750 in the 22% bracket, $1,500 at 12%. Tax credits, by contrast, reduce tax owed dollar for dollar. None of the four OBBBA provisions are credits, and none of them refund FICA payroll taxes (7.65%), which still apply to every dollar of wages, tips allocated as wages, and overtime.
When do the OBBBA deductions expire?
After tax year 2028. All four deductions — overtime, tips, car loan interest, and the senior bonus — cover tax years 2025 through 2028 only, unless Congress extends them. The sunset is written into the statute, so plan around them disappearing unless reenacted.
Can I claim these if I take the standard deduction?
Yes. All four are figured on Schedule 1-A (Form 1040) and flow to line 13b of your return, separate from the standard deduction line. Itemizers get them too. This is unusual for senior-related breaks specifically — the older additional standard deduction for age 65+ only helps standard-deduction filers — but the OBBBA versions help everyone who qualifies.
Do states honor these deductions?
Mostly no. The deductions are federal only, and whether your state follows depends on whether it starts from federal taxable income or has its own adjustments. Many states have not conformed, and some (California, Pennsylvania among them) tax the overtime or tip income normally at the state level even though it is deductible federally. Check your state tax agency's 2025 conformity guidance before assuming anything on your state return.
What MAGI do the phase-outs use?
Adjusted gross income from Form 1040 line 11, with a few rare add-backs (mainly certain foreign earned income exclusions) spelled out in the Schedule 1-A instructions. For most filers, MAGI here equals AGI — it is not the same MAGI definition used for IRA limits or Medicare IRMAA.
Why do tips and overtime phase out slower for singles than the senior deduction?
Different mechanisms. Tips and overtime use a per-$1,000 step-down of $100 — an effective 10% rate — so a single filer's full $25,000 tip deduction survives $250,000 above the threshold, to $400,000 MAGI (the $12,500 overtime cap zeroes out at $275,000). Car loan interest steps down $200 per $1,000 (20%), erasing its $10,000 cap within $50,000 above the threshold. The senior deduction uses a straight 6% of excess MAGI — the gentlest of the four. The Schedule 1-A line-by-line math implements all three, and our calculators follow it exactly.
⚠️ This calculator provides estimates for informational and educational purposes only. It is not tax advice. Results are based on the One Big Beautiful Bill Act (OBBBA) and IRS Schedule 1-A. Consult a qualified tax professional for your specific situation.