The four new OBBBA deductions.
The One Big Beautiful Bill Act created four entirely new tax deductions — tips, overtime, auto loan interest, and a $6,000 senior deduction — all consolidated on the new Schedule 1-A. Here’s how each one works, who qualifies, the phase-outs, and what most coverage misses.
All four deductions, on one form.
Schedule 1-A (Form 1040), released by the IRS on March 2, 2026 (IR-2026-28), consolidates the four deductions created by the One Big Beautiful Bill Act. All four can be claimed whether you itemize or take the standard deduction. All four are temporary — they expire after tax year 2028 unless Congress extends them.
Most coverage calls these “above-the-line” deductions. They aren’t, technically. Schedule 1-A totals don’t flow into the AGI calculation on Form 1040 — they reduce taxable income, but not AGI. The practical effect is the same for most filers (less tax owed), but the distinction matters if you’re checking eligibility for AGI-gated benefits like Roth IRA contributions, IRMAA Medicare surcharges, or the premium tax credit. These four deductions don’t help with any of those.
What Schedule 1-A actually looks like.
The IRS released Schedule 1-A in IR-2026-28 on March 2, 2026 — well after the start of the filing season, which has created some confusion. The form has five parts: one for MAGI calculation, and one for each of the four deductions.
The five parts of the form, in order. Part I has to be completed first because the MAGI it calculates is what gates eligibility for all the others.
The MAGI calculation in Part I is OBBBA-specific. It starts with AGI and adds back certain excluded income — most notably the Foreign Earned Income Exclusion under Form 2555. If you’re claiming FEIE, your Schedule 1-A MAGI will be higher than your regular AGI, which can push you past the phase-out thresholds for the OBBBA deductions even if your AGI is well below them. This is a meaningful trap for expats and remote workers abroad.
No Tax on Tips — up to $25,000.
Tax years 2025–2028. Sunset after Dec 31, 2028 unless extended.A deduction for qualified tip income received in occupations the IRS has listed as “customarily and regularly receiving tips” on or before December 31, 2024. The tip income must be reported — voluntary cash tips, charged tips, or tip-sharing pool amounts all count, but only if they show up on a W-2 (box 7), a 1099-NEC, 1099-K, or are self-reported on Form 4137.
You qualify if
- You work in an IRS-listed customarily-tipped occupation (the list as of Dec 31, 2024 governs — restaurant servers, bartenders, taxi/rideshare drivers, hairdressers, bellhops, etc.)
- Your tip income is reported through W-2 box 7, 1099-NEC, 1099-K, or self-reported via Form 4137
- Your MAGI is below $150K single / $300K MFJ (full deduction)
- You have a Social Security Number valid for work
- You’re filing as Single, MFJ, HoH, or Qualifying Surviving Spouse
You don’t qualify if
- Your occupation wasn’t on the IRS customarily-tipped list as of Dec 31, 2024 — even if you receive tips (e.g., consultants who got tipped on Stripe)
- Your tip income wasn’t reported through any of the qualified mechanisms
- Your MAGI exceeds the phase-out completion threshold (exact level pending final IRS guidance)
- You’re filing as Married Filing Separately — this deduction is not available to MFS filers
No Tax on Overtime — premium portion only.
Tax years 2025–2028. Sunset after Dec 31, 2028 unless extended.A deduction for the premium portion of overtime pay paid to non-exempt employees under the Fair Labor Standards Act (FLSA) Section 7 — or an equivalent state law. Critically, only the premium portion qualifies — meaning the “half” of “time and a half.” If your regular wage is $30/hr and you earn $45/hr on overtime, only the $15/hr premium is deductible — not the full $45.
You qualify if
- You’re a non-exempt employee under FLSA (or your state’s equivalent overtime law)
- You received premium pay for hours worked beyond 40 in a workweek (or beyond your state’s overtime threshold)
- The premium pay is reflected in your pay records — pay stubs, payroll exports, or W-2 supplementary statements
- Your MAGI is below $150K single / $300K MFJ
- You’re filing as Single, MFJ, HoH, or Qualifying Surviving Spouse
You don’t qualify if
- You’re a salaried exempt employee (most managers, professionals, administrators) — exempt status means no FLSA overtime, which means nothing qualifies
- Your “overtime” is actually shift differential, weekend pay, holiday pay, or other non-FLSA premium — only FLSA Section 7 overtime qualifies
- Your 2025 W-2 doesn’t break out the premium separately — the IRS confirmed 2025 W-2s won’t have a dedicated box for overtime premiums, so you need detailed pay stubs to substantiate
- You’re filing as Married Filing Separately
If you earn $30/hr regular and $45/hr overtime, your hourly overtime pay is $45. Your deductible “premium” is $15/hr — the half above your regular rate. Some employers and payroll systems describe overtime pay as “$45/hr time-and-a-half”; only the $15/hr extra above $30 is deductible under §70202. Working 200 hours of overtime at this example pay rate produces $3,000 of deductible premium — not $9,000.
Auto Loan Interest — up to $10,000.
Tax years 2025–2028. Loan must originate after OBBBA enactment date (July 4, 2025).A deduction for interest paid on a loan for a new, US-final-assembled, personal-use passenger vehicle or light truck. Codified as IRC §163(h)(4) and reported in Part IV of Schedule 1-A. The deduction is for the interest only — principal payments don’t qualify — and the loan must have originated after July 4, 2025 (the OBBBA enactment date).
The vehicle must
- Be new at time of purchase — used vehicles don’t qualify even if they’re domestic
- Have final assembly in the United States — verified by VIN on Schedule 1-A Part IV
- Be a passenger automobile or light truck — not a commercial vehicle
- Be for personal use — not a business vehicle
- Have taxpayer’s original use begin with the loan-financed purchase
Loans that don’t qualify
- Loans on used vehicles, no matter the assembly location
- Loans on vehicles with final assembly outside the US — including many popular brands assembled in Mexico, Canada, Japan, or Europe
- Loans that originated before July 4, 2025 — even if you refinanced after
- Vehicles purchased for business use (those potentially qualify for separate business deductions)
- Leases — lease payments don’t qualify; only loan interest does
Senior $6,000 Deduction — and how it phases out.
Tax years 2025–2028. Stackable with existing TCJA senior add-on.A $6,000 deduction for taxpayers who are 65 or older by December 31 of the tax year. If both spouses on a joint return are 65+, the combined deduction can reach $12,000. This is separate from — and stacks with — the existing additional standard deduction for seniors that’s been in the code since the 1980s ($2,050 single / $1,650 per qualifying joint spouse for 2026). It also stacks with the standard deduction itself, or with itemized deductions.
The catch: a relatively steep phase-out. The deduction reduces at a 6%-per-dollar rate above MAGI thresholds — $75,000 for single filers, $150,000 for MFJ. That means the deduction is fully gone at MAGI of $175,000 single / $250,000 MFJ. (At a 6% phase-out rate, every $1,000 above the threshold removes $60 of deduction; $6,000 ÷ $60 = $100,000 of phase-out range above the threshold.)
| MAGI | Excess over $75K | Reduction (6%) | Remaining deduction |
|---|---|---|---|
| $60,000 | $0 | $0 | $6,000 (full) |
| $75,000 | $0 | $0 | $6,000 (full) |
| $95,000 | $20,000 | −$1,200 | $4,800 |
| $125,000 | $50,000 | −$3,000 | $3,000 |
| $150,000 | $75,000 | −$4,500 | $1,500 |
| $175,000+ | $100,000+ | −$6,000 | $0 (fully phased out) |
For MFJ with both spouses 65+: thresholds become $150K (start) and $350K (full phase-out). The reduction is calculated separately for each spouse’s $6,000.
What stacks with what.
A common point of confusion: can these new OBBBA deductions be claimed alongside the standard deduction? Alongside itemized? Alongside each other? Short answer: yes to almost all combinations, with the only meaningful constraint being filing status.
| OBBBA deduction | With standard deduction | With itemized | With other OBBBA deductions | MFS filers |
|---|---|---|---|---|
| Tip deduction (§70201) | ✓ | ✓ | ✓ | ✕Not allowed |
| Overtime deduction (§70202) | ✓ | ✓ | ✓ | ✕Not allowed |
| Auto loan interest (§70203) | ✓ | ✓ | ✓ | ✓Allowed |
| Senior deduction (§70103) | ✓+ existing senior add-on | ✓ | ✓ | ✕Not allowed |
For a single filer age 65+ who works overtime and recently bought a US-assembled car, three of the four deductions can be claimed simultaneously on top of the standard deduction and the existing TCJA senior add-on. For someone who also has tip income, all four stack. The cumulative deduction floor for a maximally-eligible taxpayer is large: $6,000 (senior) + $12,500 (overtime) + $10,000 (auto loan interest) + $25,000 (tips) = $53,500 above the standard deduction, before phase-outs.
Both age 67. Margaret bartends part-time at a restaurant — $18,000 in W-2 wages plus $14,000 in reported tips. David works overtime at a warehouse — $52,000 W-2 wages plus $8,000 in FLSA-qualifying overtime premium (above his regular rate). They bought a US-assembled 2026 SUV in November 2025; their auto loan interest in 2026 will be $5,200. Combined Social Security: $36,000. They file MFJ. Standard deduction. Pre-OBBBA-deductions AGI: $128,000.
| Item | Notes | Amount |
|---|---|---|
| AGI (before Schedule 1-A) | Wages + Social Security taxable portion + tips + overtime | $128,000 |
| Standard deduction | MFJ 2026 | −$32,200 |
| Existing senior add-on | Both 65+ × $1,650 each (MFJ) | −$3,300 |
| Subtotal — before OBBBA | Pre-Schedule-1-A taxable income | $92,500 |
| + Tip deduction (§70201) | Margaret’s $14,000 tips (under $25K cap, MAGI under $300K) | −$14,000 |
| + Overtime deduction (§70202) | David’s $8,000 FLSA premium (under $25K MFJ cap) | −$8,000 |
| + Auto loan interest (§70203) | 2026 interest on US-assembled new SUV (under $10K cap) | −$5,200 |
| + Senior deduction (§70103) | Both 65+, MAGI $128K — under $150K phase-out start, full deduction | −$12,000 |
| Taxable income | After Schedule 1-A deductions | |
| Final 2026 taxable income | $53,300 | |
Without the four Schedule 1-A deductions, Margaret and David’s taxable income would be $92,500 — putting them well into the 22% bracket. With the deductions, taxable income drops to $53,300, which keeps almost all their taxable income in the 12% bracket (the 12% bracket for MFJ 2026 goes up to $100,800). The tax savings is roughly $7,400 compared to the pre-OBBBA scenario, driven mostly by income moving from the 22% to the 12% bracket plus the $39,200 of new deductions.
Notice that the four Schedule 1-A deductions reduce taxable income in this example — but their AGI remains $128,000. That matters because the senior deduction’s phase-out is calculated on MAGI (which starts from AGI), not on the post-deduction figure. If their pre-deduction AGI had been, say, $180,000, the senior deduction would be partially phased out — even though their final taxable income after all four deductions might still look modest.
Your state may not honor these deductions.
Federal tax law doesn’t automatically apply at the state level. Each state chooses whether to “conform” to federal definitions of taxable income or to define its own. For the OBBBA deductions, state conformity is mixed — and at least one state has already declined.
New Jersey confirmed on December 1, 2025 that it does not conform to the federal tips, overtime, or senior deductions created by OBBBA. New Jersey residents who claim these deductions on their federal return must add the amounts back when computing New Jersey state taxable income — meaning the federal benefit is partly clawed back at the state level.
Before assuming you’ll get the full federal benefit, check your state’s tax authority website for an OBBBA conformity statement. The big federal-tax sites generally don’t track state conformity carefully — and even your federal-only tax software may calculate your state liability incorrectly if your state has issued non-conformity guidance after the software’s last update.
States to watch with the highest likelihood of decoupling: New Jersey, California, Massachusetts, Minnesota, Maryland, and Hawaii (which historically decouple from federal tax changes). States more likely to conform: those with rolling conformity statutes (most states).
The state brackets by state page is being updated to flag OBBBA conformity status as guidance is issued by each state’s department of revenue.
The questions readers keep asking.
Do these reduce my AGI or only my taxable income?
Only taxable income, not AGI — per the IRS’s Schedule 1-A structure (released in IR-2026-28). Schedule 1-A’s totals flow to Form 1040 in a way that reduces taxable income but doesn’t appear in the AGI line.
The practical implication: AGI-gated benefits (Roth IRA contribution eligibility, IRMAA Medicare premium tiers, premium tax credit thresholds, IRA deduction phase-outs for active participants) are not improved by claiming these deductions. If your AGI is currently $145K and that puts you right at the edge of a Roth IRA phase-out, taking $20K of tip deductions won’t get you under the phase-out — your AGI is still $145K. Most marketing copy calls these “above-the-line,” which would imply they do reduce AGI; technically that framing is wrong.
Does the overtime deduction cover ALL my overtime pay?
No — only the premium portion. If your regular rate is $30/hour and your overtime rate is $45/hour (“time and a half”), the deductible amount is $15/hour — the half above your regular rate — not the full $45.
This is a meaningful detail because the marketing language (“no tax on overtime”) implies a much larger benefit than the reality. For someone earning $30/hour who works 200 hours of overtime in a year at “time and a half,” the deductible amount is 200 × $15 = $3,000 — not $9,000. The deduction is capped at $12,500 for singles or $25,000 for MFJ, so reaching the cap requires a lot of overtime (or a high regular rate).
I bought a US-assembled car in March 2025 — does the interest qualify?
No. The auto loan interest deduction (§70203) requires the loan to have originated after the OBBBA enactment date — July 4, 2025. Loans originated before July 4, 2025 don’t qualify, even if every other condition (new, US-assembled, personal use) is met.
The same rule means refinancing an existing loan after July 4, 2025 doesn’t help — the IRS-issued guidance specifies original loan origination date, not refinance date. If you’re considering a new vehicle purchase and the deduction matters to your math, the loan needs to be a brand-new origination after the enactment date.
Which vehicles count as “US-assembled”?
Final assembly must occur in the United States. This is verified by VIN entered on Schedule 1-A Part IV. The first character of the VIN encodes the assembly country — “1”, “4”, or “5” indicate US-assembled.
The NHTSA maintains a free VIN-decoder tool at vpic.nhtsa.dot.gov/decoder that confirms assembly location. Common US-assembled vehicles include many Ford, GM, Stellantis, and Tesla models — but the same nameplate may be US-assembled at one plant and foreign-assembled at another, so always check the specific VIN. Many popular models (most Toyota Camrys for the US market are made in Kentucky; Honda Accords in Ohio; BMW X5 in South Carolina) are US-assembled despite foreign brand names. Conversely, some “American” brands assemble certain models in Mexico or Canada.
If I’m 64 and my spouse is 66, do we get the senior deduction?
One $6,000 deduction — for your spouse only. The senior deduction is per-qualifying-person, not per-return. Each spouse on a joint return is evaluated independently for the age-65 condition.
If you turn 65 mid-year, the IRS uses the rule that you’re treated as 65 if you reach age 65 by the last day of the tax year. So someone who turns 65 on December 31, 2026 qualifies for the 2026 senior deduction; someone who turns 65 on January 1, 2027 does not (for tax year 2026 — they’d qualify for 2027 instead).
What happens after 2028?
Three of the four OBBBA deductions — tips, overtime, and senior — sunset after December 31, 2028. The auto loan interest deduction also sunsets after 2028. Unless Congress extends them, none of these four deductions will be available for tax year 2029 or later.
The OBBBA’s permanent provisions — TCJA brackets, larger standard deduction, $2,200 child tax credit, $15M estate exemption, QBI deduction, AMT structure — survive past 2028. But anything specifically on Schedule 1-A is on a four-year sunset clock.
Can I amend my 2025 return to claim these if I didn’t?
Yes. If you filed your 2025 return before Schedule 1-A was finalized (March 2, 2026) or before realizing you qualified for one of the OBBBA deductions, you can amend with Form 1040-X. The 1040-X needs to include the new Schedule 1-A as an attachment.
The 1040-X filing window is generally three years from the original filing deadline, so 2025 returns can be amended through approximately April 15, 2029. If amending generates a refund of more than a few hundred dollars, it’s almost always worth the effort.