The headlines said “no tax on tips” and “no tax on overtime.” The law, as laws from Congress tend to, says something smaller and much longer. These are deductions, not exemptions, and each one comes with a fence around it.
That doesn’t make them bad news. For the right household, they’re worth real money on the 2025 through 2028 returns. The trick is knowing whether you’re the right household before you plan around them.
Below is what the four new deductions (opens in a new tab) do, who qualifies, and what they’re worth. We read the fine print so you don’t have to. It’s our idea of a good time, which tells you a lot about us.
First, the part the headlines skipped
All four are deductions. They reduce taxable income; they don’t erase tax. A $5,000 deduction in the 12% bracket saves about $600 of federal income tax, not $5,000.
They also don’t touch payroll tax. Social Security and Medicare still come out of every tip and overtime dollar.
The good news: you can claim them whether or not you itemize. They sit on top of the standard deduction.
Tips: up to $25,000
You can deduct up to $25,000 of qualified tips per year. To get there, all of these have to be true:
- Your job is on the IRS list. Treasury published the occupations that customarily received tips as of December 31, 2024. Servers, bartenders, hair stylists and rideshare drivers are typical examples. If your job isn’t on the list, your tips don’t qualify.
- The tips are voluntary. Cash or card tips the customer chooses to leave, including tip-pool shares. A mandatory 18% service charge on a large party is not a tip.
- The tips are reported. On a W-2, a 1099, or Form 4137. Unreported cash doesn’t qualify, which is one more reason to report it.
- You aren’t in a “specified service” business. Health, law, accounting, consulting, performing arts and similar fields are excluded, whether you’re self-employed or work for one.
- You file jointly if you’re married, and your Social Security number is on the return.
The deduction shrinks by $100 for every $1,000 of modified AGI above $150,000 ($300,000 joint).
Overtime: only the “half”
This is the one people overestimate most. You don’t deduct your overtime pay. You deduct the premium: the extra half in time-and-a-half required by federal law.
Say you earn $30 an hour and work 300 overtime hours at $45. You were paid $13,500 for those hours. The deductible amount is the $15 premium times 300 hours: $4,500. In the 12% bracket, that’s about $540 of federal tax saved. Worth claiming. Maybe hold off on the boat.
Two more fences:
- It has to be overtime required under the Fair Labor Standards Act. Extra pay your employer offers voluntarily, or overtime under a state rule or union contract beyond the federal requirement, generally doesn’t count.
- The cap is $12,500 ($25,000 joint), phasing down above $150,000 of modified AGI ($300,000 joint).
Starting with 2026 pay, your W-2 (opens in a new tab) should show qualified overtime in Box 12 with code TT, and qualified tips with code TP. For 2025, employers weren’t required to break these out, so many people had to work from pay stubs.
Car loan interest: up to $10,000
This one has more fences than a Scottsdale subdivision:
- New vehicle only. Original use has to start with you. Used cars don’t qualify.
- Final assembly in the United States. Check the label on the vehicle, or the plant code in the VIN using NHTSA’s VIN decoder (opens in a new tab). The brand doesn’t decide it; the factory does. Plenty of foreign brands are assembled here, and some domestic brands aren’t. We don’t make the rules. We just read them for a living.
- Loan originated after December 31, 2024, secured by the vehicle. Leases don’t qualify.
- Personal use. Business vehicles go through the business, not this deduction.
- Under 14,000 pounds. Cars, SUVs, pickups, vans and motorcycles.
- VIN on the return. Every year you claim it.
The deduction shrinks by $200 for every $1,000 of modified AGI above $100,000 ($200,000 joint). Realistic value: a $40,000 loan at 7% runs roughly $2,700 of interest in year one. In the 22% bracket, that’s about $600.
Seniors: an extra $6,000 per person
If you’re 65 or older by December 31, you get an additional $6,000 deduction. A married couple who both qualify gets $12,000. This stacks on top of the existing extra standard deduction for seniors.
It phases out at 6% of modified AGI above $75,000 ($150,000 joint). Married couples must file jointly.
What about Arizona?
Arizona passed a conformity law in June 2026 (HB 4168 (opens in a new tab)) that carries the tips, overtime and senior deductions onto the Arizona return for 2025 and later years. Car loan interest is the odd one out: Arizona allows it for 2025 only, at least for now. If you already filed a 2025 Arizona return without these, an amended return may be worth a look. Arizona’s flat 2.5% rate makes the state savings modest, but it isn’t zero.
The quick test
Before you count on any of these, answer three questions:
- Does my income sit below the phase-out range?
- Do I meet every requirement, not just the headline one?
- Is the deduction documented: on a W-2, a 1099, a loan statement, a vehicle label?
If any answer is “I’m not sure,” that’s the conversation to have before you file, not after a notice arrives. IRS notices are many things. A pleasant surprise is not one of them.
How we handle this on your return
Every MCR individual return comes with a plain-language summary that shows what you claimed and why. If one of these deductions applies to you, you’ll see it. If it doesn’t, you’ll know that too. Clarity cuts both ways.
This post is general information, not tax advice for your situation. Rules current as of October 2026.