The One Big Beautiful Bill Act (OBBBA) created four brand-new deductions that apply for tax years 2025 through 2028: for qualified tips, for overtime premium pay, for interest on certain car loans, and for taxpayers age 65 and older. They were marketed as "no tax on tips" and "no tax on overtime" — but the real rules are narrower than the slogans, and all four share one technical trait that changes planning: they do not reduce AGI.
Here is what each deduction actually does, per the IRS's published guidance. Everything below is U.S. federal law, effective for tax years 2025–2028 unless noted.
The four deductions at a glance
| Deduction | Annual cap | Income phase-out begins (MAGI) |
|---|---|---|
| Qualified tips | $25,000 | $150,000 ($300,000 joint) |
| Overtime premium pay | $12,500 ($25,000 joint) | $150,000 ($300,000 joint) |
| New car loan interest | $10,000 | $100,000 ($200,000 joint) |
| Seniors 65+ | $6,000 per eligible person | $75,000 ($150,000 joint) |
All four are claimed whether or not the taxpayer itemizes, on the new Schedule 1-A.
No tax on tips — with conditions
The tips deduction covers qualified tips — voluntary cash or charged tips received in occupations that customarily and regularly received tips, per the IRS's published occupation list. Key limits from the IRS FAQ:
- Cap of $25,000 per year; for the self-employed, the deduction can't exceed the net income of the business the tips came from.
- Phases out when modified AGI passes $150,000 ($300,000 on a joint return).
- The tips still need to be reported (W-2, 1099, or Form 4137) — the deduction happens on the return; it does not make tips invisible.
"No tax on tips" is therefore really "a capped, phase-out-limited federal income tax deduction for reported tips." Payroll taxes (Social Security and Medicare) still apply.
No tax on overtime — only the premium half
The overtime deduction covers the premium portion of overtime pay required by the Fair Labor Standards Act — the "half" in time-and-a-half, not the whole overtime check. A worker earning $20/hour paid $30/hour for overtime deducts the $10 premium per overtime hour, up to $12,500 ($25,000 joint), with the same $150,000/$300,000 phase-out as tips.
Car loan interest — new, personal-use, U.S.-assembled
The car loan deduction allows up to $10,000 of interest on a loan for a new personal-use vehicle whose final assembly occurred in the United States. Used vehicles, leases, and fleet/commercial use don't qualify; the phase-out starts at $100,000 MAGI ($200,000 joint).
The senior deduction — and it stacks
Taxpayers age 65+ get an additional $6,000 deduction each — a 65+ married couple filing jointly can claim $12,000 — on top of the regular additional standard deduction for age that already existed. It phases out above $75,000 MAGI ($150,000 joint). For retirees whose income is mostly Social Security, this often zeroes out federal tax on modest additional income.
The AGI trap preparers should flag
All four OBBBA deductions are taken after adjusted gross income is computed. That means they lower taxable income but do not help with anything keyed to AGI or MAGI:
- The Saver's Credit income tiers
- The EITC phase-out
- Traditional IRA deductibility phase-outs
- Premium Tax Credit household income
A server with heavy tip income may owe little federal income tax thanks to the tips deduction and still fail an AGI cliff by a few hundred dollars. The above-the-line levers — traditional IRA, HSA — remain the tools that move AGI. We cover that interaction in our tax year 2026 key figures guide.
Temporary by design
All four provisions currently expire after tax year 2028. Treat them as a four-year window in planning conversations, not a permanent feature of the code.
Checking the fine print per client
Occupation lists, MAGI definitions, and Schedule 1-A mechanics are exactly the kind of details that change with IRS guidance. TaxSentry keeps the IRS's OBBBA pages, FAQs, and the underlying revenue procedures in its knowledge base and cites them in every answer — so when a client asks "do my tips qualify?", the answer comes with the IRS document behind it.