OBBBA created four new personal deductions for tax years 2025 through 2028, all consolidated on new IRS Schedule 1-A released March 2, 2026 (IR-2026-28). The deductions: (1) a $6,000 senior bonus deduction for taxpayers age 65+ (OBBBA §70103); (2) a deduction of up to $25,000 of qualified tip income (OBBBA §70201, IRC §224); (3) a deduction of up to $12,500/$25,000 of FLSA-required overtime PREMIUM pay (OBBBA §70202, IRC §225); and (4) a deduction of up to $10,000 of interest on loans for US-assembled personal-use vehicles (OBBBA §70203, IRC §226). All four are BELOW-THE-LINE - they reduce taxable income but NOT adjusted gross income. They are available to both itemizers and non-itemizers. Each has its own phaseout regime. The deductions are TEMPORARY, sunsetting after December 31, 2028 unless extended. Stacked at maximum amounts: a single filer claiming all four could reduce taxable income by up to $53,500; a married couple where both spouses qualify for all four could reduce taxable income by up to $72,000. The "no tax on tips" and "no tax on overtime" marketing overstates the benefit - FICA still applies, and the deductions reduce only federal regular income tax (not state, not payroll tax).
(1) Senior Bonus (OBBBA §70103): $6,000 per individual age 65+. Phaseout begins MAGI $75K single / $150K MFJ; complete at $175K / $250K.
(2) Tips (OBBBA §70201, IRC §224): Up to $25,000 qualified tip income. Phaseout begins $150K / $300K. SSTB excluded.
(3) Overtime (OBBBA §70202, IRC §225): Up to $12,500 single / $25,000 MFJ of FLSA Section 7 required overtime PREMIUM only (the extra-half portion). Phaseout begins $150K / $300K.
(4) Auto Loan Interest (OBBBA §70203, IRC §226): Up to $10,000 interest on loans for US-assembled new personal-use vehicles. Loan secured after 12/31/2024.
All sunset: Tax years 2025-2028 only. Without extension, expire after 12/31/2028.
Schedule 1-A: New IRS form released March 2, 2026 (IR-2026-28); attaches to Form 1040.
Unlike traditional above-the-line deductions (which reduce AGI), the four OBBBA deductions are BELOW-THE-LINE. They reduce taxable income but NOT adjusted gross income. This has significant downstream consequences:
| Implication | Detail |
|---|---|
| Available with standard deduction | YES - claimable whether itemizing or not |
| Reduces taxable income | YES - directly lowers income subject to regular tax |
| Reduces AGI | NO - AGI remains unchanged |
| Impact on ACA premium tax credit | NONE - based on MAGI which is not reduced |
| Impact on IRMAA Medicare premium surcharge | NONE - IRMAA based on MAGI |
| Impact on Social Security taxability calculation | NONE - based on MAGI plus 50% of SS benefits |
| Impact on Roth contribution phaseouts | NONE - based on MAGI |
| Impact on education credit phaseouts | NONE |
| FICA / Self-Employment Tax | STILL APPLIES - tips and overtime remain subject to FICA/SE tax |
| State income tax (where state conformity) | Varies - many states do not conform; verify state-by-state |
| Senior Bonus Deduction | Detail |
|---|---|
| Authority | OBBBA §70103 (amends IRC §63) |
| Effective period | Tax years 2025-2028 |
| Amount | $6,000 per eligible individual age 65+ ($12,000 total for MFJ where both spouses age 65+) |
| Age eligibility | Must attain age 65 on or before the last day of the taxable year (December 31) |
| Filing status | Single, MFJ, Head of Household, Qualifying Surviving Spouse. MFS NOT eligible. |
| Itemizers vs non-itemizers | Available regardless of itemizing election |
| Phaseout begins (MAGI) | $75,000 single / $150,000 MFJ |
| Phaseout complete (MAGI) | $175,000 single / $250,000 MFJ |
| Phaseout calculation | 6% of MAGI excess over threshold reduces the deduction (linear phaseout) |
| Stacks with existing senior addition | YES - this $6,000 is IN ADDITION to existing §63(f) senior addition to standard deduction (~$1,600-$2,000 depending on filing status) |
| Schedule 1-A | Reported on Schedule 1-A; flows to Form 1040 taxable income calculation |
Facts: Married couple, both age 67, filing MFJ. MAGI $180,000.
Step 1 - Maximum deduction: $6,000 + $6,000 = $12,000 (both spouses 65+).
Step 2 - Phaseout calculation: MAGI $180,000 exceeds threshold $150,000 by $30,000. Phaseout = $30,000 × 6% = $1,800.
Step 3 - Allowed deduction: $12,000 - $1,800 = $10,200.
Step 4 - At 22% marginal bracket: Federal tax savings = $10,200 × 22% = $2,244.
Stack with existing senior addition: $1,600 × 2 = $3,200 existing senior standard deduction add-on remains available. Total senior benefit: $10,200 OBBBA + $3,200 existing = $13,400.
| Qualified Tips Deduction | Detail |
|---|---|
| Authority | OBBBA §70201; IRC §224 (new) |
| Effective period | Tax years 2025-2028 |
| Maximum deduction | $25,000 |
| Self-employed cap | Cannot exceed net business income (computed without the deduction) from the trade or business in which tips were earned |
| Qualifying tips | VOLUNTARY cash or charged tips from customers, or through tip sharing. Mandatory service charges NOT eligible (those are wages, not tips). |
| Reporting requirement | Tips must be reported on Form W-2, Form 1099, or other specified statement, OR self-reported by individual on Form 4137 |
| Eligible occupations | Occupations IRS lists as "customarily and regularly" receiving tips on or before December 31, 2024. IRS published occupation list by October 2, 2025. |
| SSTB exclusion | Self-employed in §199A Specified Service Trade or Business NOT eligible. Employees whose employer is in SSTB also NOT eligible. |
| MFJ requirement | Married couple must file JOINTLY to claim (MFS not eligible) |
| SSN requirement | Must include valid SSN on Form 1040 |
| Phaseout begins (MAGI) | $150,000 single / $300,000 MFJ |
| Phaseout mechanic | $100 reduction per $1,000 (or fraction) of MAGI excess over threshold |
| FICA still applies | YES - "no tax on tips" reduces federal regular income tax only |
| Worker | Eligible | Reasoning |
|---|---|---|
| Restaurant server, bartender | YES | Listed customarily-tipping occupation |
| Hair stylist, barber, esthetician, massage therapist | YES | Listed |
| Hotel housekeeping, bellhop, concierge | YES | Listed |
| Taxi, rideshare, pizza/food delivery driver, valet | YES | Listed |
| Mandatory 18% service charge for large parties | NO | Mandatory service charges are wages, not tips |
| Office worker receiving "tips" labeled as such | NO | Office work not on customarily-tipping list |
| Lawyer, accountant, financial advisor with year-end gratuity | NO | SSTB exclusion under §199A applies |
| Self-employed hairstylist (Schedule C) | YES if not SSTB | Tips capped by net business income; hair salon generally not SSTB |
| Qualified Overtime Deduction | Detail |
|---|---|
| Authority | OBBBA §70202; IRC §225 (new) |
| Effective period | Tax years 2025-2028 |
| Maximum deduction | $12,500 single / $25,000 MFJ |
| Qualifying overtime | FLSA Section 7 required overtime PREMIUM only - the EXTRA HALF portion of time-and-a-half pay (NOT total overtime compensation) |
| FLSA exempt workers | NOT eligible - salaried managers, professionals, executives exempt under FLSA Section 13(a) do not qualify |
| State or contract-mandated overtime | NOT eligible - only FLSA-required premium qualifies. State law overtime, union contract overtime, double-time, holiday pay all excluded unless FLSA-mandated. |
| 1099 contractors | NOT eligible - independent contractors are not "employees" under FLSA |
| MFJ requirement | Must file jointly to claim if married |
| SSN requirement | Required on Form 1040 |
| Phaseout begins (MAGI) | $150,000 single / $300,000 MFJ |
| Phaseout mechanic | $100 reduction per $1,000 (or fraction) of MAGI excess over threshold |
| 2025 W-2 reporting gap | 2025 W-2s do NOT have a separate box for overtime premium - taxpayers must calculate from paystubs. Notices 2025-62 and 2025-69 confirmed the gap and provided transition relief. |
| 2026 W-2 reporting | Beginning tax year 2026, employers report qualifying overtime premium in W-2 Box 12, code "TT" |
| FICA still applies | YES - overtime premium still subject to FICA/Medicare |
Facts: Single FLSA non-exempt construction worker, base rate $25/hr, overtime rate $37.50/hr (time-and-a-half). Worked 500 hours of overtime in 2025. Total overtime compensation = 500 × $37.50 = $18,750. MAGI $90,000.
Step 1 - Identify qualifying premium: The "premium" is the EXTRA HALF portion = $12.50/hour ($37.50 - $25.00). 500 hours × $12.50 = $6,250 qualifying premium. NOT the full $18,750.
Step 2 - Apply cap: $6,250 is under the $12,500 single cap. Full $6,250 deductible.
Step 3 - Phaseout check: MAGI $90,000 below $150,000 threshold. No phaseout.
Step 4 - At 22% marginal bracket: Federal tax savings = $6,250 × 22% = $1,375.
FICA still owed: Worker still pays 7.65% FICA on full $18,750 overtime ($1,434 employee share); employer pays match. The deduction does NOT reduce FICA exposure.
| Auto Loan Interest Deduction | Detail |
|---|---|
| Authority | OBBBA §70203; IRC §226 (new) |
| Effective period | Tax years 2025-2028 |
| Maximum deduction | $10,000 of interest paid per year |
| Loan timing | Loan must be taken out AFTER December 31, 2024 (refinances of pre-2025 loans generally not eligible) |
| Vehicle requirement - final assembly in US | Vehicle's FINAL ASSEMBLY must occur in the United States. Verify via Vehicle Identification Number (VIN) - first character of VIN indicates manufacturing country. |
| Vehicle type | New passenger vehicle for PERSONAL use (not business use). New only - used vehicles not eligible. |
| Loan structure | Loan must be secured by a "first lien" on the vehicle |
| Personal use requirement | Vehicle must be used for personal purposes (commuting/personal driving). Business-use vehicles deduct interest via Schedule C/business return separately. |
| Phaseout begins (MAGI) | $100,000 single / $200,000 MFJ (lower than the others) |
| Phaseout mechanic | $200 reduction per $1,000 of MAGI excess over threshold |
| Itemizers vs non-itemizers | Available regardless of itemizing |
| Lender reporting | Form 1098-VLI (new) - lenders report qualifying vehicle loan interest |
| VIN-based final assembly verification | First character of VIN: "1," "4," or "5" indicates US assembly. Other prefixes indicate non-US assembly (e.g., "J" Japan, "K" Korea, "W" Germany). |
| VIN First Character | Country | Eligible |
|---|---|---|
| 1, 4, 5 | United States | YES |
| 2 | Canada | NO |
| 3 | Mexico | NO |
| J | Japan | NO (even if Toyota, Honda, etc.) |
| K | South Korea | NO (even if Hyundai, Kia) |
| W | Germany | NO |
| S | United Kingdom | NO |
| Y | Sweden, Finland | NO |
IRS released Schedule 1-A on March 2, 2026 (Information Release IR-2026-28) consolidating all four OBBBA personal deductions:
| Schedule 1-A Section | Purpose |
|---|---|
| Part I - MAGI calculation | Starts with AGI from Form 1040 Line 11; adds back §911, §931, §933 foreign earned income exclusions; computes MAGI for all four phaseouts |
| Part II - Senior Bonus Deduction | Age verification, deduction computation, phaseout calculation |
| Part III - Qualified Tips Deduction | Tip income reporting, occupation verification, SSTB check, phaseout calculation |
| Part IV - Qualified Overtime Deduction | FLSA premium computation, phaseout calculation |
| Part V - Auto Loan Interest Deduction | VIN verification, qualifying interest, phaseout calculation |
| Final line | Total OBBBA deductions flowing to Form 1040 taxable income calculation |
| Deduction | Single Max | MFJ Max (Both Qualify) |
|---|---|---|
| Senior $6,000 | $6,000 | $12,000 |
| Tips $25,000 | $25,000 | $25,000 (per spouse if both eligible separately) |
| Overtime | $12,500 | $25,000 |
| Auto Loan Interest | $10,000 | $10,000 |
| Combined potential | $53,500 maximum | $72,000 maximum (with caveats - tips and OT realistically not stackable for one taxpayer earning both at max levels) |
| State Position | Approach (verify annually) |
|---|---|
| Rolling federal conformity states | Automatically conform to federal Schedule 1-A deductions unless state legislature decouples |
| Static conformity states | Conform to federal IRC as of specific date - depends on whether state updated conformity to post-OBBBA Code |
| Decoupled - no state benefit | New Jersey, Massachusetts, others - state does not adopt Schedule 1-A deductions |
| Hybrid approach | Some states selectively conform to some Schedule 1-A items but not others |
Tipped workers in non-conforming states (e.g., New Jersey) still owe state income tax on full tip income despite federal deduction. Practitioner must compute state taxable income separately.
All four OBBBA personal deductions expire after December 31, 2028 unless Congress extends them. Planning considerations:
| Planning Topic | Consideration |
|---|---|
| Vehicle purchase timing | Auto loan interest deduction only applies to loans secured 2025-2028. Vehicle purchase planning may accelerate to capture the deduction. |
| Career timing for tipped workers | Tips deduction available 2025-2028. Workers in tipped occupations who can defer non-tip income to post-2028 may stack the tip deduction with full earnings. |
| Overtime timing | Workers with control over scheduling can concentrate overtime in 2025-2028. |
| Roth conversion interaction | Senior deduction may shelter Roth conversion income from regular tax (within phaseout limits). Strategic conversions in 2025-2028 may benefit from the deduction. |
| Permanent extension uncertainty | Future Congress may extend; may not. Plan around the 2028 sunset; treat extension as a possibility, not a certainty. |
The single largest error: assuming the deduction covers all overtime compensation. Only the FLSA Section 7 PREMIUM portion (the extra half of time-and-a-half pay) qualifies. For a worker earning $30/hour regular and $45/hour overtime, only the extra $15/hour premium qualifies - not the full $45.
California, Colorado, and several other states have stricter overtime requirements than FLSA (e.g., daily overtime in California after 8 hours). The OBBBA deduction is FLSA-specific only. State-mandated overtime that exceeds FLSA requirements does not qualify. Practitioners in California especially must distinguish FLSA-required premium from California state-required premium.
Employees whose employer is an SSTB under §199A (law firms, accounting firms, medical practices, financial services, consulting, athletic services, performing arts, brokerage services) are NOT eligible for the tip deduction. A bartender at a lawyer's reception event tipped at year-end is not eligible. The SSTB cuts both ways - both the worker AND the employer's SSTB status disqualify.
Married Filing Separately is INELIGIBLE for all four deductions. Couples considering MFS for other reasons (e.g., income-driven student loan repayment plans, separation, asset protection) lose all four deductions. Modeling MFJ vs MFS must account for the full OBBBA deduction loss.
Taxpayer must include a valid SSN on Form 1040 to claim tip and overtime deductions. ITIN-only filers are excluded. This is a major issue for some immigrant tipped workers.
Brand is not the determinant - VIN is. A Ford assembled in Mexico (VIN starts with "3") does not qualify; a Toyota assembled in Kentucky (VIN starts with "1") does. Practitioners must verify the actual VIN, not the brand.
2025 W-2s do not have a Box 12 code "TT" for overtime premium. Workers must calculate the premium portion from paystubs themselves. Notices 2025-62 and 2025-69 confirmed the gap and granted transition relief. Practitioners must request paystubs from Clients claiming the deduction.
The auto loan must be a NEW loan secured after 12/31/2024. Refinancing a pre-2025 loan generally does not qualify unless the refinance is treated as a new loan transaction (facts and circumstances; pending guidance).
Senior phaseout: 6% per dollar above threshold. Tips/overtime phaseout: $100 per $1,000 above threshold (effective 10%). Auto loan phaseout: $200 per $1,000 above threshold (effective 20%). The different phaseout rates create different "donut hole" effective marginal rates that practitioners must model for high earners near phaseout completion.
Many states have not yet legislated on Schedule 1-A conformity. Practitioners assuming federal-state parity may miscompute state taxable income. Verify state conformity each filing season - state tax bills throughout 2026 may change positions.
Clients hearing "no tax on tips" expect to owe zero on tip income. Practitioners must explain: FICA (7.65% employee share plus employer match) STILL applies; state income tax may STILL apply; and the federal income tax reduction is limited to the deduction amount × marginal rate. A tipped worker in the 22% bracket "saves" about 22% on tips - not 100%.
Personal-use vehicle only. Business-use vehicles deduct interest separately on Schedule C or business return. Mixed-use vehicles (commuting + business) must allocate. Vehicle used predominantly for business does not qualify for the §226 personal deduction.
Primary authority: One Big Beautiful Bill Act, P.L. 119-21, signed July 4, 2025. §70103 (senior bonus deduction $6,000 for taxpayers age 65+; effective 2025-2028; MAGI phaseout begins $75K single / $150K MFJ, completes at $175K / $250K; 6% phaseout rate). §70201 (IRC §224, qualified tips deduction up to $25,000; effective 2025-2028; voluntary cash or charged tips from listed occupations; SSTB exclusion; MAGI phaseout begins $150K single / $300K MFJ at $100 per $1,000). §70202 (IRC §225, qualified overtime deduction up to $12,500 single / $25,000 MFJ; FLSA Section 7 premium portion only; effective 2025-2028; same phaseout structure as tips). §70203 (IRC §226, auto loan interest deduction up to $10,000; loan after 12/31/2024; vehicle final assembly in US; new personal-use only; first-lien secured; MAGI phaseout begins $100K single / $200K MFJ at $200 per $1,000). IRC §63 (standard deduction; §63(f) existing senior addition $1,600-$2,000 stacks with §70103 OBBBA senior bonus). IRC §199A (QBI deduction; SSTB definition referenced for tips disqualification). IRC §911 / §931 / §933 (foreign earned income exclusions added back for MAGI calculation). IRC §4137 (self-reporting of tip income to IRS). Fair Labor Standards Act Section 7 (overtime requirement at time-and-a-half for non-exempt employees over 40 hours/week). FLSA Section 13(a) (exemptions for executive, administrative, professional). IRS Schedule 1-A (released March 2, 2026 per IR-2026-28; attaches to Form 1040). IRS Notice 2025-62 (transition relief for 2025 W-2 reporting gap on overtime premium). IRS Notice 2025-69 (additional 2025 W-2 / 1099 transition relief). Form 1098-VLI (new vehicle loan interest reporting form for lenders). IRS Notice 2025 occupation list (qualifying tipped occupations published by October 2, 2025 deadline). W-2 Box 12 code "TT" (employer reporting of qualifying overtime premium beginning tax year 2026).