Data Notice: This article covers provisions of the One, Big, Beautiful Bill Act signed into law on July 4, 2025. Tax rules, thresholds, and phase-outs are subject to future IRS guidance. Verify details with official IRS publications and a licensed tax professional.

One Big Beautiful Bill: 4 New Tax Deductions for 2026 You Need to Know

This article provides general tax education and is not a substitute for professional tax advice. Laws discussed here may change. Work with a licensed tax advisor for decisions affecting your specific tax situation.

The One, Big, Beautiful Bill Act, signed into law on July 4, 2025, introduced four new above-the-line deductions that millions of working Americans can claim starting with the 2025 tax year. These deductions cover tips, overtime pay, car loan interest, and an enhanced senior deduction. All four are claimed on the new IRS Schedule 1-A and are available whether you itemize or take the standard deduction.

Here is a breakdown of each deduction, who qualifies, and how to claim them on your return.

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1. Tips Deduction (“No Tax on Tips”)

Workers who receive qualified tips can now deduct up to $25,000 of tip income per year. This applies to voluntary cash or charged tips received from customers or through tip sharing arrangements.

Who Qualifies

• Employees and self-employed individuals who receive and report tips
• Self-employed individuals cannot deduct more than their net income from that business
• Individuals in a Specified Service Trade or Business (SSTB) and their employees do not qualify

Phase-Out Thresholds

The deduction phases out for taxpayers with modified adjusted gross income (MAGI) over:

• $150,000 for single filers
• $300,000 for married filing jointly

Requirements

You must include your Social Security Number on the return, and married taxpayers must file jointly to claim this deduction. Tips must be properly reported on your W-2 or Schedule C.

For more context on how this fits into your overall filing, see our Federal Income Tax Guide 2026.

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2. Overtime Deduction (“No Tax on Overtime”)

Workers who put in extra hours can deduct up to $12,500 of qualified overtime compensation per year ($25,000 for married couples filing jointly).

What Counts as Overtime

Qualified overtime compensation is defined as pay exceeding your regular rate under Section 7 of the Fair Labor Standards Act. This means the deduction applies to the premium portion of overtime pay — the amount above your regular hourly rate — not the entire paycheck for overtime hours.

Phase-Out Thresholds

Same as the tips deduction:

• $150,000 MAGI for single filers
• $300,000 MAGI for married filing jointly

Practical Example

If your regular rate is $30/hour and you earn time-and-a-half ($45/hour) for 200 overtime hours, your qualified overtime compensation is $15/hour x 200 hours = $3,000. That $3,000 is deductible, subject to income limits.

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3. Car Loan Interest Deduction

Taxpayers who purchased a new vehicle with an auto loan originated after December 31, 2024 can deduct up to $10,000 in interest paid per year.

Vehicle Requirements

According to IRS guidance on the car loan interest deduction, a qualified vehicle must meet all of these criteria:

• New vehicle — original use begins with the taxpayer
• Personal use only — no business or commercial vehicles
• Final assembly in the United States
• Gross vehicle weight rating under 14,000 pounds
• Qualified types include cars, minivans, vans, SUVs, pickup trucks, and motorcycles

Lease payments do not qualify. The loan must be secured by a vehicle lien, and you must include the Vehicle Identification Number (VIN) on your tax return.

Phase-Out Thresholds

• $100,000 MAGI for single filers
• $200,000 MAGI for married filing jointly

Reporting

If you paid at least $600 of interest in 2025, your lender should have provided a statement by January 31, 2026, showing the total interest paid. This information goes on Schedule 1-A.

For background on how auto deductions fit into broader self-employment filings, see our Self-Employment Tax Guide.

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4. Enhanced Senior Deduction

Taxpayers age 65 or older by year-end can claim an additional deduction of up to $6,000 per qualifying individual ($12,000 for married couples where both spouses are 65 or over).

Phase-Out Thresholds

• $75,000 MAGI for single filers
• $150,000 MAGI for married filing jointly

This deduction supplements the existing additional standard deduction for seniors. It is available whether you itemize or claim the standard deduction.

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How to Claim: Schedule 1-A

All four deductions are reported on the new IRS Schedule 1-A, which was first used during the 2026 filing season for 2025 tax returns. You calculate the applicable deduction amounts, add them together, and include the total on line 13b of your Form 1040 or Form 1040-SR.

Key points about Schedule 1-A:

• Available to both standard deduction and itemized filers
• Each deduction has its own section on the form with specific worksheets
• You can claim multiple deductions simultaneously if you qualify
• The form is available through all major tax preparation software

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Duration and Sunset

All four deductions are effective for tax years 2025 through 2028 unless Congress extends them. Planning around these deductions should account for their temporary nature.

For workers in tip-heavy industries — restaurants, hospitality, personal services — the tips deduction alone could save thousands annually. Combined with the overtime deduction, a worker earning $50,000 in tips and $10,000 in overtime premiums could shelter up to $35,000 from federal income tax.

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What This Means for Your 2025 Filing

If you haven’t yet filed your 2025 return, check whether you qualify for any of these deductions. The IRS has noted that taxpayers who already filed without claiming Schedule 1-A deductions can file an amended return using Form 1040-X.

For a complete overview of all 2026 tax changes, including updated brackets and standard deduction amounts, see our State Income Tax Comparison and Capital Gains Tax Guide.

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Sources

1. One, Big, Beautiful Bill Act: Tax deductions for working Americans and seniors — IRS — accessed March 26, 2026
2. Schedule 1-A, Additional Deductions: What to know about the new form — IRS — accessed March 26, 2026
3. One, Big, Beautiful Bill provisions – Individuals and workers — IRS — accessed March 26, 2026