Beginning with the 2025 tax year, the One Big Beautiful Bill Act introduces several new federal tax provisions aimed at specific groups of taxpayers. Each of these provisions are available to individual taxpayers whether or not they itemize deductions but applies only to tax years 2025 through 2028.
What is the new senior tax deduction?
Individuals age 65 or older will be eligible for a $6,000 federal tax deduction without the need to itemize. This deduction begins to phase out at a modified adjusted gross income (MAGI) of $75,000 for single filers and $150,000 for married couples filing jointly. The deduction is fully phased out at $175,000 for single filers and $250,000 for joint filers. The reduction rate is six cents for every dollar above the threshold. For example, a single filer with a MAGI of $100,000 would see their deduction reduced by $1,500, allowing them to claim $4,500.
What is the overtime deduction under the new tax law?
Under the new law, overtime compensation, as required under the Fair Labor Standards Act, may be deductible. The maximum deduction allowed is $12,500 for single filers and $25,000 for joint filers. To qualify for the full deduction, individuals must earn less than $150,000 if filing single or $300,000 if married filing joint. The deduction begins to phase out by $100 for every $1,000 by which the taxpayer’s MAGI exceeds these income thresholds. The deductible portion of overtime pay is limited to the amount by which their overtime wage exceeds their regular wage. For example, if an employee earns $30 per hour standard and $45 per hour for overtime, only the $15 difference is eligible for deduction. This provision applies only to federal income tax, does not affect payroll taxes and requires that married couples file jointly.
How does the deduction for reported tips work?
Employees and self-employed individuals working in tipped occupations may qualify for a new deduction of up to $25,000 per year. To qualify for the full deduction, individuals must earn less than $150,000 if filing single or $300,000 if married filing joint. The deduction begins to phase out by $100 for every $1,000 by which the taxpayer’s MAGI exceeds these income thresholds. Tips must be reported on an IRS form (such as W-2, 1099 or 4137) under the taxpayer’s Social Security number to qualify. For self-employed individuals, any deduction is capped at the net income from the tipped business and “specified service trades or businesses” are excluded. The IRS defines “qualified tips” as cash tips received in occupations that customarily and regularly received tips on or before December 31, 2024. The list of eligible occupations is published in regulations under the qualified tips deduction (Code Sec. 224).
Who benefits most from these new tax deductions?
These occupations fall into eight broad categories, each containing multiple specific listed jobs:
- Beverage and food service
- Entertainment and events
- Hospitality and guest services
- Home services
- Personal services
- Personal appearance and wellness
- Recreation and instruction
- Transportation and delivery
Each category includes specific occupations such as restaurant servers, bartenders, taxi and rideshare drivers, food delivery drivers, hairdressers, hotel bellhops, hotel housekeepers, casino dealers, and many more listed in the regulation appendix.
Only voluntary tips received in these listed occupations are eligible for the deduction.