On July 4, 2025, the One Big Beautiful Bill Act (Public Law 119-21) was signed into law. It introduces several temporary tax deductions effective for tax years 2025 through 2028, aimed at working Americans and seniors. Below is a summary of the key provisions.
1. Deduction for Tips
- Up to $25,000 per year deduction for qualified tips reported by employees or self-employed individuals in IRS-designated tipped occupations.
- Applies to cash and credit tips, including tip pooling.
- Phases out at modified adjusted gross income (MAGI) over $150,000 ($300,000 joint filers).
- Available to both itemizing and standard deduction filers.
- Excludes self-employed individuals and employees in specified service trades or businesses (SSTBs) under section 199A.
- Requires Social Security Number (SSN) on return and joint filing if married.
- Employers/payors must report cash tips and occupation to IRS; IRS will publish qualifying occupations list by October 2, 2025.
- Transition relief applies for 2025.
2. Deduction for Overtime Pay
- Deduction for the “premium” portion of overtime pay (e.g., the additional half under time-and-a-half rules) covered by the Fair Labor Standards Act (FLSA).
- Maximum deduction of $12,500 per year ($25,000 joint filers).
- Phases out at MAGI over $150,000 ($300,000 joint filers).
- Available to both itemizing and standard deduction filers.
- Requires SSN on return and joint filing if married.
- Employers/payors must report total qualified overtime compensation to IRS.
- Transition relief applies for 2025.
3. Deduction for Car Loan Interest
- Up to $10,000 per year deduction for interest on loans used to purchase a new personal-use vehicle.
- Vehicle must be under 14,000 pounds, assembled in the United States, and purchased after December 31, 2024.
- Loan must be secured by the vehicle; leases and used vehicles do not qualify.
- Phases out at MAGI over $100,000 ($200,000 joint filers).
- Available to both itemizing and standard deduction filers.
- Requires Vehicle Identification Number (VIN) on tax return.
- Lenders must report qualified interest to IRS.
- Transition relief applies for 2025.
4. Additional Deduction for Seniors
- Additional $6,000 deduction per eligible individual aged 65 or older ($12,000 if both spouses qualify).
- In addition to existing senior standard deduction.
- Phases out at MAGI over $75,000 ($150,000 joint filers).
- Available to both itemizing and standard deduction filers.
- Requires SSN of qualifying individuals and joint filing if married.
Key Takeaways
These provisions offer targeted tax relief for lower- and middle-income Americans who earn tips, work overtime, finance new vehicle purchases, or are seniors. Businesses, payroll departments, and lenders will have new reporting obligations. Taxpayers and professionals should prepare early to ensure compliance and maximize available deductions.