3 New Tax Breaks for Individuals

The One Big Beautiful Bill Act (OBBBA) introduces three potentially valuable tax breaks for individual taxpayers that weren't previously available. And you don't have to itemize deductions to take advantage of them. Do you qualify? Read on and find out.  

1. Deduction for Some Tip Income: The Basics

Before the OBBBA, tip income was fully taxable for federal income tax purposes. Now, for 2025 through 2028, the OBBBA provides a temporary deduction that can offset up to $25,000 of qualified tip income each year. It's available whether you claim the standard deduction or itemize deductions for the tax year.

It's available to workers who received qualified tips in an occupation that the IRS designates as customarily and regularly receiving tips before 2025. The IRS is directed to provide the list of qualifying occupations by October 2, 2025. Qualified tips can be paid by customers in cash or with credit cards or given to workers through tip sharing.

The deduction is available for both employees and self-employed individuals. Qualified tips must be reported on Form W-2, Form 1099, or another information return or statement that's furnished to both the worker and the IRS. On August 7, 2025, the IRS announced that there won't be any changes to the federal payroll return forms or withholding tables for 2025. In the coming weeks, the IRS may provide additional guidance for the 2025 tax year for taxpayers who claim the tip deduction and for employers and payors subject to new reporting requirements. Contact your tax advisor for the latest developments.

Important: This is a federal income tax deduction, not an income exclusion. Therefore, federal payroll taxes will apply, and state and local income taxes may apply (if applicable).

Rules and Restrictions for the Tip Income Deduction

Several rules and restrictions apply when claiming the new deduction for tips. For self-employed individuals, the deduction can't exceed the amount of your net income, before the deduction, from the trade or business in which you earned the tips. Married people must file a joint return to claim the tip deduction. And you're required to provide a Social Security number on the return to claim the deduction.

This deduction is also subject to a phaseout rule. It starts phasing out when your modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for married couples filing jointly). Then it's reduced by $100 for each $1,000 of MAGI above the applicable phaseout threshold. So, it's fully phased out once your MAGI reaches $400,000 ($550,000 for married couples filing jointly). Realistically, however, few people who earn tip income will be affected by the phaseout rule.

Additionally, self-employed individuals and employees of specified service trades or businesses (SSTBs) are ineligible for the tip deduction. (For this purpose, an SSTB is defined under the qualified business income deduction rules.) An SSTB is any trade or business that provides services in the following fields:

• Health,
• Law,
• Accounting,
• Actuarial science,
• Performing arts,
• Consulting,
• Athletics,
• Financial services,
• Brokerage services,
• Investing and investment management,
• Trading or dealing in securities, partnership interests or commodities.

An SSTB may also include any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. This can be demonstrated by the receipts of fees or other compensation for:

• Endorsing products or services,
• The use of the taxpayer's image, likeness, name, signature, voice, trademark or any other symbols associated with the individual's identity, or
• Appearing at an event or on radio, television or another media format.

2. Deduction for Some Overtime Income: The Basics

Before the OBBBA, overtime income was fully taxable for federal income tax purposes. Now, for 2025 through 2028, the OBBBA provides a temporary deduction that can offset up to $12,500 of qualified overtime income each year ($25,000 for married couples filing jointly). It's available whether you claim the standard deduction or itemize deductions for the tax year.

For purposes of the deduction, qualified overtime compensation has a specific definition. It's defined as overtime compensation paid to an individual as required by Section 7 of the Fair Labor Standards Act of 1938 that's above the regular rate at which that individual is employed. For instance, if you earn time-and-a-half for overtime, the extra half constitutes qualified overtime income. Qualified overtime compensation doesn't include any qualified tip income.

The overtime pay must be reported on a Form W-2 or other specified statement furnished to the taxpayer and the IRS. As explained above, on August 7, 2025, the IRS announced that there won't be any changes to the federal payroll return forms or withholding tables for 2025. As with tip income, the IRS may provide additional guidance in the coming weeks for the 2025 tax year for taxpayers claiming this deduction and employers and payors subject to new reporting requirements. Contact your tax advisor for the latest developments.

Important: This is a federal income tax deduction, not an income exclusion. Therefore, federal payroll taxes will apply, and state and local income taxes may apply (if applicable).

Rules and Restrictions for the Overtime Income Deduction

Several rules and restrictions apply when claiming a deduction for overtime. If you're married, you must file a joint return to claim the overtime deduction.

This deduction is also subject to a phaseout rule. It starts phasing out when your MAGI exceeds $150,000 ($300,000 for married couples filing jointly). Then it's reduced by $100 for each $1,000 of MAGI above the applicable phaseout threshold. So, it's fully phased out once your MAGI reaches $275,000 ($550,000 for married couples filing jointly).

3. Deduction for Car Loan Interest

Under current federal income tax rules, so-called personal interest expense generally can't be deducted. One major exception is so-called qualified residence interest (home mortgage interest), which can be deducted, subject to some limitations, if you itemize. The OBBBA adds another exception. The new deduction is for qualified passenger vehicle loan interest.

The new law grants eligible individuals a temporary new deduction for some or all of the interest paid on loans to purchase qualifying personal-use passenger vehicles. Specifically, for 2025 through 2028, up to $10,000 of car loan interest can potentially be deducted each year, regardless of whether you itemize or claim the standard deduction. The loan must be taken out after 2024 and must be a first lien secured by a vehicle used for personal purposes. Leased vehicles don't qualify. Your lender must file an information return with the IRS that shows the amount of interest paid during the year on your qualified car loan.

If an original qualified car loan is refinanced, the new loan will be a qualified loan as long as two conditions are met:

1. The new loan is secured by a first lien on the eligible vehicle, and
2. The initial balance of the new loan doesn't exceed the ending balance of the original loan.

Rules and Restrictions for the Car Loan Interest Deduction

Several rules and restrictions apply when claiming a deduction for car loan interest. Like the other two new deductions described above, it's subject to a phaseout rule. It starts phasing out when your MAGI exceeds $100,000 ($200,000 for married couples filing jointly). Then it's reduced by $200 for each $1,000 of MAGI above the applicable phaseout threshold. So, it's fully phased out once your MAGI reaches $150,000 ($250,000 for married couples filing jointly).

To qualify for the new deduction, the vehicle must be:

• A car, minivan, van, SUV, pickup truck or motorcycle, with a gross vehicle weight rating under 14,000 pounds,
• Manufactured primarily for use on public streets, roads and highways, and
• New (meaning the original use begins with you).

In addition, the vehicle's final assembly must occur in the United States. Final assembly means when the manufacturer produces the vehicle at or through the use of a plant, factory or other place from which the vehicle is delivered to a dealer with all the components necessary for its operation. You must report the vehicle identification number (VIN) on your tax return. The VIN will have a special number that indicates it was assembled domestically.

Interest on the following types of loans don't qualify for the new deduction:

• Loans to finance fleet sales,
• Loans to buy a vehicle not used for personal purposes,
• Loans to buy a vehicle with a salvage title or a vehicle intended to be used for scrap or parts,
• Loans from certain related parties, and
• Any lease financing.

Americans bought more than 15 million new cars in 2024, and about 80% of buyers relied on loans to finance their purchases. So, the ability to deduct car loan interest will appeal to many buyers. That said, the new deduction is off limits for high-income buyers. Also be aware that only loans to buy new vehicles qualify for the deduction, and foreign imports don't qualify.

Good News, Bad News

While these new tax breaks don't exactly fulfill President Trump's campaign promises of no taxes on tips or overtime and a deduction for all car loan interest, they're still good news for those who qualify. For more information, contact your Porte Brown tax advisor.