The One Big Beautiful Bill Act, signed into U.S. law on July 4 (Public Law 119-21), takes effect for 2025. It includes several tax breaks for working and senior Americans.
No Tax on Tips
Effective for 2025 through 2028, employees and self-employed individuals may deduct qualified tips received in occupations that are listed by the U.S. Internal Revenue Service (IRS) as customarily and regularly receiving tips on or before December 31, 2024, and that are reported on a Form W-2, Form 1099, or other specified statement furnished to the individual or reported directly by the individual on Form 4137.
"Qualified tips" are voluntary cash or charged tips received from customers or through tip sharing.
The maximum annual deduction is $25,000; for self-employed individuals, the deduction may not exceed an individual's net income (without regard to this deduction) from the trade or business in which the tips were earned.
The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
The tax deduction is available for both itemizing and non-itemizing taxpayers.
Self-employed individuals in a Specified Service, Trade, or Business (SSTB) under section 199A are not eligible. Employees whose employer is in an SSTB are also not eligible.
Taxpayers must include their Social Security Number on the return and file jointly if married, to claim the deduction.
Employers and other payors must file information returns with the IRS (or the SSA) and furnish statements to taxpayers showing the amount of specific cash tips received and the occupation of the tip recipient.
By October 2, 2025, the IRS will publish a list of occupations that "customarily and regularly" received tips on or before December 31, 2024. The IRS will also provide transition relief for tax year 2025 to taxpayers claiming the deduction, as well as to employers and payors subject to the new reporting requirements.
No Tax on Overtime
Effective for 2025 through 2028, individuals who receive qualified overtime compensation may now deduct the pay that exceeds their regular rate of pay, such as the "half" portion of "time-and-a-half" compensation, that is required by the Fair Labor Standards Act (FLSA) and that is reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.
The maximum annual deduction is $12,500 ($25,000 for joint filers).
The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
The deduction is available for both itemizing and non-itemizing taxpayers. Taxpayers must include their Social Security Number on the return and file jointly if married, to claim the deduction.
Employers and other payors are required to file information returns with the IRS (or SSA) and furnish statements to taxpayers showing the total amount of qualified overtime compensation paid during the year.
The IRS will provide transition relief for tax year 2025 to taxpayers claiming the deduction, as well as to employers and other payors subject to the new reporting requirements.
No Tax on Car Loan Interest
Effective for 2025 through 2028, individuals may also deduct interest paid on a loan used to purchase a qualified vehicle, provided the car is purchased for personal use and meets other eligibility criteria. (Lease payments do not qualify.)
The maximum annual deduction is $10,000.
The deduction phases out for taxpayers with modified adjusted gross income over $100,000 ($200,000 for joint filers). To qualify for the deduction, the interest must be paid on a loan that originated after December 31, 2024, was used to purchase a vehicle, and the original use of which starts with the taxpayer for a personal use vehicle (not for business or commercial use) and secured by a lien on the vehicle. Interest paid for used vehicle purchases does not qualify. If a qualifying vehicle loan is later refinanced, interest paid on the refinanced amount is generally eligible for the deduction.
A qualified vehicle is a car, minivan, van, SUV, pickup truck, or motorcycle with a gross vehicle weight rating of less than 14,000 pounds that has undergone final assembly in the United States. The location of final assembly will be listed on the vehicle information label attached to each vehicle on a dealer's premises. Alternatively, taxpayers may rely on the vehicle's place of manufacture as reported in the vehicle identification number (VIN) to determine if a car has undergone final assembly in the United States.
The VIN Decoder website, provided by the National Highway Traffic Safety Administration (NHTSA), offers information on the plant of manufacture. Taxpayers can follow the instructions on that website to determine if the vehicle's place of manufacture was located in the United States. The VIN Decoder is publicly accessible at https://vpic.nhtsa.gov/decoder/.
The deduction is available for both itemizing and non-itemizing taxpayers.
The taxpayer must include the Vehicle Identification Number (VIN) of the qualified vehicle on the tax return for any year in which the deduction is claimed.
Lenders or other recipients of qualified interest must file information returns with the IRS and furnish statements to taxpayers showing the total amount of interest received during the taxable year.
The IRS will provide transition relief for tax year 2025 for interest recipients subject to the new reporting requirements.
New Tax Deduction for Seniors
Also effective for 2025 through 2028, individuals aged 65 and older may claim an additional deduction of $6,000. This new deduction is in addition to the current additional standard deduction for seniors under existing law.
The $6,000 senior deduction is per eligible individual (i.e., $12,000 total for a married couple where both spouses qualify).
The deduction phases out for taxpayers with modified adjusted gross income over $75,000 ($150,000 for joint filers).
To qualify for the additional deduction, a taxpayer must attain age 65 on or before the last day of the taxable year. The deduction is available for both itemizing and non-itemizing taxpayers. Taxpayers must include the Social Security Number of the qualifying individual(s) on the return, and file jointly if married, to claim the deduction.