The 2025 updates to the Tax Cuts and Jobs Act (TCJA)—part of the One Big Beautiful Act—introduce three new deductions that could reduce your taxable income without requiring you to itemize.
From tip income to overtime pay to car loan interest, these changes apply to many working Americans and could result in meaningful tax savings between 2025 and 2028. But each deduction has specific limits, income phase-outs, and eligibility rules you’ll want to understand.
Let’s break them down.
1. Deduction for Tip Income
What Changed
For the first time, taxpayers can deduct tip income
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Maximum deduction: $25,000 per year
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Years available: 2025 through 2028
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Income phase-out:
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Single filers: Phase-out starts at $150,000 modified AGI
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Married filing jointly: Phase-out starts at $300,000 modified AGI
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This deduction applies to tip income already reported elsewhere on your tax return (you still have to report your tips as income first).
Example
Maria, a restaurant server in Palm Desert, earns $28,000 in wages and $20,000 in reported tips in 2025. Under the new law, she can deduct up to $20,000 (since she didn’t exceed the $25,000 limit), and potentially lowering her taxable income enough to qualify for additional credits.
2. Deduction for Overtime Income
What Changed
Qualified overtime compensation also qualifies for a deduction under the same income thresholds as the tip income deduction.
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Maximum deduction: $12,500 per taxpayer
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Years available: 2025 through 2028
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Income phase-out: Same as tip income ($150,000 single / $300,000 joint)
This deduction can apply to overtime in any qualifying employment, as long as the pay is subject to standard federal income tax.
Example
Kevin, a warehouse supervisor, earns $70,000 in base salary and $15,000 in overtime in 2026. Since he’s under the income threshold, he can deduct $12,500 of that overtime pay.
3. Deduction for Car Loan Interest
What Changed
If you have a qualified passenger vehicle loan, you can now deduct interest paid as an above-the-line deduction.
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Maximum deduction: $10,000 per year
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Years available: 2025 through 2028
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Income phase-out:
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Single filers: Phase-out starts at $100,000 modified AGI
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Married filing jointly: Phase-out starts at $200,000 modified AGI
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This deduction applies whether the vehicle is used for personal or business purposes, but business-related interest may already be deductible elsewhere, so coordination is key.
Example
Sandra buys a new SUV in 2025 and pays $8,500 in loan interest that year. Her MAGI is $85,000, so she qualifies for the full deduction.
Eligibility Summary Table
| Deduction | Limit | Years Available | Income Phase-Out (Single) | Income Phase-Out (Joint) |
|---|---|---|---|---|
| Tip Income | $25,000 | 2025–2028 | $150,000 | $300,000 |
| Overtime Income | $12,500 | 2025–2028 | $150,000 | $300,000 |
| Car Loan Interest | $10,000 | 2025–2028 | $100,000 | $200,000 |
Planning Tips to Maximize Benefits
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Track Income Carefully – Keep accurate records of tips, overtime hours, and interest paid on your vehicle loan.
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Avoid Crossing the Phase-Out Threshold – If you’re close to the income limit, consider timing bonuses, retirement contributions, or other income-shifting strategies.
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Pair with Other Deductions – Since these reduce AGI, they can help you qualify for credits like the Child Tax Credit or the Earned Income Tax Credit.
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Coordinate with Business Deductions – If you use your vehicle for business, consult a tax professional to ensure you don’t double-claim the same interest.
The Bottom Line
These new deductions create opportunities for many workers to lower their taxable income, even without itemizing. But because they’re only available from 2025 through 2028 and have specific income thresholds, planning ahead is essential.
Get Professional Guidance
At Find a Good Accountant (FAGA), we can help you:
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Determine your eligibility
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Strategically time your income and deductions
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Maximize your tax savings under the new law
📞 Call today: 760-423-6226
📍 Visit us: 74333 Highway 111 Suite 103, Palm Desert, CA 92260
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