Deductions · explained
What the One Big Beautiful Bill changed on your return
Public Law 119-21, now called the Working Families Tax Cuts by the IRS, rewrote numbers on two returns at once.
Schedule 1-A: the four new deductions together
Schedule 1-A line 38
$7,500
About $1,650 of federal income tax saved
| No tax on tips | $0 |
| No tax on overtime | $6,000 |
| Car loan interest | $1,500 |
| Enhanced deduction for seniors | $0 |
All four reduce taxable income, not AGI, and can be claimed with the standard deduction or itemizing. They run from 2025 through 2028.
The One, Big, Beautiful Bill Act, signed on July 4, 2025 as Public Law 119-21 and now presented by the IRS as the Working Families Tax Cuts, changed federal income tax from the 2025 return onward. It made the seven rates of 10% to 37% permanent, raised the standard deduction to $15,750 single and $31,500 joint for 2025 ($16,100 and $32,200 for 2026), lifted the child tax credit to $2,200 per child and raised the SALT cap from $10,000 to $40,000, then $40,400 in 2026. It created four temporary deductions for 2025 through 2028 on the new Schedule 1-A: up to $25,000 of qualified tips, $12,500 of overtime premium ($25,000 joint), $10,000 of interest on a new US-assembled car and $6,000 per person aged 65 or older, each phased out by income. From 2026 it adds a charitable deduction for non-itemizers, a 0.5% floor for itemizers, a richer dependent care credit and a higher estate exclusion of $15,000,000. It also ended the clean vehicle credits after September 30, 2025 and the home energy credits after 2025.
Checked by Radif Partners · Editorial policy · How we calculate
Rates and the standard deduction: permanent, and higher
The 2017 rates of 10%, 12%, 22%, 24%, 32%, 35% and 37% were due to expire after 2025, when the old schedule with a top rate of 39.6% would have returned. Section 70101 made them permanent; the thresholds keep moving with inflation each year, as the 2026 brackets show. Section 70102 did the same for the larger standard deduction and added to it: $15,750, $23,625 and $31,500 for 2025, indexed to $16,100, $24,150 and $32,200 for 2026. The alternative minimum tax exemption also stays at its higher level, but for 2026 it phases out from $500,000 single at a 50% rate instead of 25%, so high earners reach the AMT sooner, as the AMT page explains.
Four temporary deductions, one new form
Schedule 1-A carries the four deductions created for 2025 through 2028. All are taken below AGI, with or without itemizing, and all require a joint return for married people.
| Deduction | Maximum | Phase-out | Page |
|---|---|---|---|
| Qualified tips | $25,000 | $100 per $1,000 of MAGI above $150,000 / $300,000 | tips |
| Qualified overtime premium | $12,500 / $25,000 | $100 per $1,000 above $150,000 / $300,000 | overtime |
| Car loan interest | $10,000 | $200 per $1,000 above $100,000 / $200,000 | car loan |
| Seniors 65 and older | $6,000 each | 6% of MAGI above $75,000 / $150,000 | seniors |
The headline names promise more than the arithmetic gives. A server with $12,000 of tips and $48,000 of modified AGI deducts $12,000 for 2025, which at a 12% rate is worth $1,440; Social Security and Medicare are still withheld on every tip. Overtime counts only for the premium the Fair Labor Standards Act requires, one third of time-and-a-half pay. The car must be new, bought with a loan made after 2024 and assembled in the United States.
No tax on tips: your deduction and what it saves
Tips deduction (Schedule 1-A line 13)
$18,000
Federal income tax saved: about $2,160
| Tips counted (capped at the maximum) | $18,000 |
| Phase-out reduction | $0 |
| Your marginal bracket before the deduction | 12% |
| Social Security and Medicare still withheld on these tips | $1,377 |
Only tips received in an occupation on the IRS list of tipped occupations count. A valid SSN is required, and a married couple must file jointly.
Families and children
The child tax credit becomes $2,200 per child for 2025 and is indexed afterward, $2,200 again for 2026, with $1,700 refundable. A valid Social Security number is now required for the child and for at least one parent on a joint return. From 2026, the child and dependent care credit starts at 50% of up to $3,000 of expenses ($6,000 for two or more), stepping down to 35% and then to 20% as income rises, and the tax-free dependent care assistance an employer can give rises to $7,500. Part of the adoption credit, up to $5,120 for 2026, becomes refundable. Trump accounts open a new savings vehicle for children, with a $1,000 federal deposit for those born from 2025 through 2028.
Itemizers: SALT up, charity floor, a cap for top earners
The SALT cap quadruples to $40,000 for 2025 and $40,400 for 2026, growing 1% a year through 2029, but it falls by 30% of modified AGI above $500,000 ($505,000 in 2026), never below $10,000. The $750,000 mortgage interest limit becomes permanent and mortgage insurance premiums count again from 2026. For 2026, charitable gifts on Schedule A only count above 0.5% of AGI, people who do not itemize can deduct up to $1,000 of cash gifts ($2,000 joint), and taxpayers in the 37% bracket see each itemized dollar worth about 35 cents. Gambling losses become deductible only up to 90% of winnings.
Investors, owners and estates
The 20% qualified business income deduction is permanent, with a minimum $400 deduction from 2026 for owners with at least $1,000 of qualified income. Businesses get permanent 100% bonus depreciation for property acquired after January 19, 2025, and a section 179 limit of $2,500,000 for 2025, $2,560,000 for 2026. The estate tax exclusion becomes $15,000,000 per person in 2026, indexed after that, instead of falling by half as scheduled under the 2017 law.
What it did not change
Payroll taxes are untouched: Social Security and Medicare apply to tips and overtime as before, and the wage base keeps rising with wages. The law did not change how Social Security benefits are taxed, despite the name of the senior deduction. Withholding tables were updated for the new rates and deductions only gradually, and workers who claim the tips or overtime deduction often see the gain as a larger refund rather than in each paycheck; the IRS Tax Withholding Estimator was updated in 2026 to account for the new rules. State income taxes follow each state's own law, so a federal deduction does not carry over automatically.
What ended
The new and used clean vehicle credits stopped for vehicles acquired after September 30, 2025; the commercial clean vehicle credit too. The energy efficient home improvement credit and the residential clean energy credit end after December 31, 2025. The premium tax credit loses its repayment caps from 2026 and is no longer available above 400% of the federal poverty line. Education credits require a valid Social Security number from 2026.
Sources: Public Law 119-21 (July 4, 2025), Title VII, Subtitle A: sections 70101 to 70120 and 70424 to 70425; IRS: Working Families Tax Cuts, provisions for individuals and workers; IRS Rev. Proc. 2025-32: 2026 inflation-adjusted items and 2025 items modified by Public Law 119-21 (October 9, 2025); Form 1040-ES (2026), What's New, read on October 11, 2026.