New Tax Deductions for Individuals
July 24, 2025
By Deb Kipper, CPA
Tax Manager
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.
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.
Overtime Deduction
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.
Deduction for Reported Tips
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 is expected to publish a list of qualifying occupations by Oct. 2, 2025, to prevent abuse of the deduction.
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