No Tax on Tips, Overtime, or Car Loan Interest

Category

New Law (OBBBA)

No tax on tips

For tax years 2025 through 2028

Individuals can claim a deduction for qualified tips of up to $25,000, subject to modified adjusted gross income (MAGI) phase out. Qualified business income (QBI) is likewise modified to not include any amount allowed for as a qualified tip deduction.

Qualified Tips:

Cash tips received by a taxpayer in an occupation that customarily and regularly received 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.

An amount is not a qualified tip unless:

1.      The amount received is paid voluntarily without any consequence for nonpayment, is not the subject of negotiation, and is determined by the payer;

2.      the trade or business in which the individual receives the amount is not a specified service trade or business as defined in Code Sec. 199A(d)(2); and

3.      other requirements established by the Treasury Secretary in regulations or other guidance are satisfied (Code Sec. 224(d)(2), as added by the OBBB Act).

A list of qualified occupations to be provided by the Treasury Secretary before October 2, 2025.

MAGI phase out:

Deduction is phased out by $100 for each $1,000 of MAGI exceeding $150,000 ($300,000 for taxpayers filing jointly)

No tax on overtime

For tax years 2025 through 2028

Individuals can claim a deduction for qualified overtime of up to $12,500 per tax year ($25,000 for joint filers), subject to MAGI phase out.

Qualified Overtime:

Overtime paid to individual required under section 7 of Fair Labor Standards Act of 1938 (FLSA). Generally, includes nonexempt employees paid at least 1 ½ of their regular rate for hours worked in excess of 40 in a week.

Employers and other payors are required to file information returns with the IRS (or SSA)and furnish statements to taxpayers showing the total amount of qualified overtime compensation paid during the year.

MAGI phase out:

Deduction is phased out by $100 for each $1,000 of MAGI exceeding $150,000 ($300,000 for taxpayers filing jointly)

No tax on car loan interest

For tax years 2025 through 2028

Individual taxpayers may deduct up to $10,000 for interest paid or accrued on a loan used to purchase a qualified passenger vehicle for personal use after 2024. The loan must be secured by a first lien on the applicable vehicle. Deduction is subject to MAGI phase out.

Vehicle Identification Number (VIN) Requirement:

All vehicles for which the qualified vehicle interest is deducted must include the VIN of the applicable passenger vehicle.

Related party loans:

Interest paid on indebtedness to a related person is disqualified for the deduction.

Final Assembly in USA requirement:

Only vehicles less than 14,000 lbs, including motorcycles, which had final assembly in the United States are qualified passenger vehicles.

MAGI phase out:

Deduction is phased out by $200 for each $1,000 of MAGI exceeding $100,000 ($200,000 for taxpayers filing jointly)