Inquiries Regarding Four Fresh Tax Exemptions, dated July 25
The "One Big Beautiful Bill Act" (OBBBA) has introduced several tax deductions for seniors, tips, overtime pay, and automobile loans, effective for tax years 2025 through 2028. Each deduction comes with specific phase-out levels and eligibility requirements based on Modified Adjusted Gross Income (MAGI).
Seniors' Deduction
Eligible individuals aged 65 or older can claim an additional below-the-line deduction of $6,000 per person ($12,000 for joint filers where both spouses qualify). This deduction is temporary from 2025 through 2028. The deduction phases out starting at $75,000 MAGI for single filers and $150,000 MAGI for joint filers, reducing by 6% of the excess MAGI over the threshold. The deduction is fully phased out at $175,000 MAGI for singles and $250,000 for joint filers. Both spouses’ deductions are reduced simultaneously in joint filers if both qualify. Eligible taxpayers must be 65 by the end of the tax year and can claim this deduction regardless of whether they itemize or take the standard deduction.
Tip Income Deduction
Workers in occupations that traditionally and customarily receive tips (with voluntary tips, not mandated) can deduct up to $25,000 of income from tips and overtime wages combined. Phase-outs start at $150,000 MAGI for singles and heads of household, and $300,000 for joint filers. This deduction is also limited to tax years 2025 through 2028.
Overtime Deduction
Workers can deduct up to $12,500 of overtime pay if single, and up to $25,000 if married filing jointly. Phase-out thresholds match those of the tip deduction: $150,000 MAGI (single/HOH) and $300,000 (joint). This is an above-the-line deduction, so it benefits taxpayers even without itemizing deductions. Temporarily available for 2025 to 2028.
Automobile Loan Interest Deduction
Interest on auto loans for vehicles purchased after December 31, 2024, is deductible if the vehicle is new, for personal use, and assembled in the United States (indicated by VIN starting with 1, 4, 5, or 7). This deduction is temporary and aligned with 2025–2028 tax years.
Summary of Phase-out Thresholds and Eligibility
| Deduction Type | Maximum Deduction | MAGI Phase-out Start | MAGI Phase-out End | Eligibility | Period | |------------------------------|----------------------|----------------------------|----------------------------|----------------------------------------|----------------| | Seniors’ Deduction | $6,000 per person | $75,000 (single), $150,000 (joint) | $175,000 (single), $250,000 (joint) | Age 65+ by year-end, both itemizers and non-itemizers | 2025–2028 | | Tip Income Deduction | Up to $25,000 total | $150,000 (single/HOH), $300,000 (joint) | Not explicitly detailed (phase-out applies) | Occupation traditionally earning tips, voluntary tips only | 2025–2028 | | Overtime Deduction (Above-line) | $12,500 (single), $25,000 (joint) | $150,000 (single/HOH), $300,000 (joint) | Same as start (gradually phases) | Wage earners receiving overtime pay | 2025–2028 | | Automobile Loan Interest | Deductible interest | Not specified | Not specified | New, US-assembled personal vehicles | 2025–2028 |
These deductions represent new tax relief targeted at working seniors, service workers relying on tips, and other wage earners, especially those with moderate MAGI. The phased approach limits benefits for higher-income taxpayers. All deductions under OBBBA are temporary, expiring after the 2028 tax year.
Under the Fair Labor Standards Act of 1938, employers must pay covered, non-exempt employees at least one-and-a-half times their "regular rate" of pay for hours worked over 40 hours a week at a given job. The determination of the regular rate of pay is based upon the actual facts of the individual's job and work schedule. The FLSA covers employees and enterprises engaged in interstate commerce, and the FLSA covers most, but not all, private and public sector employees. Employers must report overtime pay on Form W-2 (or Form 1099 for contractors). The overtime compensation deduction is available for eligible taxpayers who claim the standard deduction or itemize on Schedule A of the Form 1040.
Defi projects might find the 'Overtime Deduction' advantageous, as they can deduct up to $12,500 of overtime pay if single, or up to $25,000 if married filing jointly. This deduction is applicable to tax years 2025 through 2028. On the other hand, 'businesses' in tip-based industries could utilize the 'Tip Income Deduction,' allowing them to deduct up to $25,000 of income from tips and overtime wages combined, also for the same tax years. Yet, both deductions are subject to phase-outs.
