OBBBA: Learning the Deduction Details
The OBBBA law is long, but the IRS has summarized some of the most significant provisions:
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 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.
- Maximum annual deduction is $25,000; for self-employed, deduction may not exceed individual’s net income (without regard to this deduction) from the trade or business in which the tips were earned.
- 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. Employers and other payors must file information returns with the IRS (or SSA) and furnish statements to taxpayers showing certain cash tips received and the occupation of the tip recipient. The IRS has promised to provide transition relief for tax year 2025 for taxpayers claiming the deduction and for employers and payors subject to the new reporting requirements.
No Tax on Overtime
This provision has received a lot of attention. Here are the basics: Effective for 2025 through 2028, individuals who receive qualified overtime compensation may 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 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. For joint filers, it’s $25,000. The deduction is available for both itemizing and non-itemizing taxpayers.
No Tax on Car Loan Interest
Effective for 2025 through 2028, individuals may deduct interest paid on a loan used to purchase a qualified vehicle, provided the vehicle 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). The deduction is available for both itemizing and non-itemizing taxpayers.
Deduction for Seniors
Effective for 2025 through 2028, individuals who are age 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. Deduction is available for both itemizing and non-itemizing taxpayers.
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).
For The Future
So is this it? No! There are more provisions, and even the above provisions have further details and exceptions you need to discuss with a professional. The point is that there are many opportunities, and you should speak with your advisors today.
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