Deductions in the new federal tax bill explained

by Cherie Van Blaircum

On July 4, 2025, the President signed into law the sweeping tax code named the One Big Beautiful Bill Act. This law made permanent the tax code changes of 2017 under the Tax Cuts and Jobs Act (TCJA), including the higher Standard Deduction amount, the Qualified Business Income Deduction, the State and Local Tax cap (SALT), lower individual tax rates, Child Tax Credit expansion, and the elimination of unreimbursed employee expenses and personal and dependent exemptions.

The bill also has introduces four new deductions that go into effect this year and are worth being aware of: tip income deduction, qualified overtime pay deduction, auto loan interest deduction, and the enhanced deduction for seniors.

It’s important to understand the basics of these new deductions and how they do or don’t affect you.

Tip Income Deduction

If you are a tipped employee, you already know that federal and state income tax and Social Security and Medicare taxes are applied against any tip income that is over $20 per month. The new law allows a temporary deduction of qualified tip income of $25,000 for tax years 2025-2028 only. There is a caveat to this: You must be in an occupation that is listed by the IRS as “customarily and regularly” one that receives tips. The IRS will have the list published by Oct. 2, 2025.

Your tips must be reported on a W2 form, a Form 1099, or on a specified statement furnished to the individual or reported on Form 4137 by the individual.

There is a phase-out of the deduction for taxpayers who have a Modified Adjusted Gross Income of $150,000 for single filers and $300,000 for joint filers.

Transitional Relief for this deduction: Everyone was taxed under the old law; the new law was enacted part way through the year and is retroactive to Jan. 1. The IRS has to figure out how to tax tips and overtime so taxpayers get the effect of a Jan. 1 change. This transition requires the IRS to provide guidance on how taxpayers are supposed to get the benefits of the new law. We don’t know what this transitional relief looks like until we receive guidance from the IRS.

No Tax on Overtime

This No Tax on Overtime deduction is also temporary, for tax years 2025-2028 only. It is limited to $12,500 of overtime income for single filers and $25,000 for joint filers. Before you sign up for every hour of overtime you can, you need to be aware: This deduction only applies to the qualified overtime pay that “exceeds your regular rate of pay.” For example, if you are paid $10 per hour for regular pay but $15 per hour for overtime, this new federal income tax deduction will apply only to the $5 “overtime portion” of your pay rate.

There is a phase-out of this deduction for taxpayers who have a Modified Adjusted Gross Income of $150,000 for single filers and $300,000 for joint filers. As with the Tip Income Deduction, the IRS will provide transitional relief for this year.

No Tax on Car Loan Interest

This deduction is also temporary, for tax years 2025-2028 only, and is limited to $10,000 of interest paid on qualified new vehicles.

This tax relief applies to vehicles purchased for personal use only and not business or commercial vehicles. The vehicle must be new, with its first use starting with the tax payer; no used vehicles allowed.

A qualified vehicle is defined as a car, minivan, van, SUV, pick-up truck, or motorcycle with a gross vehicle weight of less than 14,000 pounds. The qualified vehicle must have undergone final assembly in the United States.

You will need to report your VIN on your tax return. Lenders will be required to furnish a statement to the taxpayer showing the total amount of interest received.

The car loan has to be taken out after Dec. 31, 2024, and must be secured by the vehicle, in other words, you can’t use funds from a second mortgage or a credit card to pay for the vehicle.

There is a phase-out of the deduction for taxpayers who have a Modified Adjusted Gross Income of $100,000 for single filers and $200,000 for joint filers. As with the other two deductions, the IRS will provide transitional relief for this year.

Deduction for Seniors

This deduction is temporary, for tax years 2025-2028 only, and only applies to individuals who are age 65 and older. It is an additional $6,000 deduction per eligible individual or $12,000 deduction for a married couple (if both spouses are 65 years or older).

There is a phase-out of the deduction for taxpayers who have a Modified Adjusted Gross Income of $75,000 for single filers and $150,000 for joint filers.

Other important information

It is important to note that all of these new deductions are available whether or not you itemize on your tax return. All of these deductions are temporary and all have phase-outs based on your modified adjusted gross income. All of these new deductions except the Deduction for Seniors will require some sort of transitional relief from the IRS.

In addition to these deductions, the new tax bill also introduced the following:

• Increased the SALT deduction for itemized filers from $10,000 to $40,000. Phase out begins for joint filers earning more than $500,000 and married couples filing separately earning more than $250,000.
• Made permanent the Child Tax Credit of up to $2,200 per child (under age 17), adjusted annually for inflation.  Required taxpayers and children must have valid Social Security numbers in order to claim this credit.
• Eliminated the energy efficient improvement credit effective Jan. 1, 2026. This is the last year you can receive up to a 30% credit for the cost of all of these eligible home improvements made during the year, for example, new energy efficient windows, doors, insulation, certain stoves, biomass boilers, electric panels, and related equipment.
• The Electric Vehicle credit is eliminated for all EVs purchased after Sept. 30, 2025.

If you are not sure if you qualify for any of these new deductions, reach out to your tax preparer to discuss your questions.

Cherie Van Blaircum owns CTS-Tax, LLC, in Gregory, Michigan.