IRS Rolls Out New Tax Deductions –What To Expect

Tax season just got a little more interesting — and complicated. The IRS is launching a new Schedule 1-A form for the 2025 tax year, letting taxpayers claim fresh deductions for tip income, overtime pay, car loan interest, and a special break for seniors 65 and older. Here’s the catch: these deductions won’t be an easy out for everyone, and some of the fine print is downright eyebrow-raising.

What’s New? Four Deductions, One Form

The new Schedule 1-A, a two-pager, is your ticket to claiming tax breaks tucked into the so-called One Big Beautiful Bill Act that became law this past July 4th. Eligible taxpayers can now deduct:

• Qualified tip income

• Qualified overtime pay

• Car loan interest (but only on new vehicles assembled in the US)

• An enhanced deduction for seniors 65+

The best part? You don’t have to itemize your deductions to get these breaks — standard deduction users, rejoice. But don’t get too excited just yet: income limits and other restrictions clip the wings of these deductions, which only last through 2028.

Car Loans? Yes, But Don’t Try This With Your Used Clunker

Thinking about claiming that car loan interest? Hold on. The deduction only applies if you bought a new car with final assembly in the USA in 2025. Used cars and imports need not apply. Plus, the IRS wants the vehicle identification number on your Schedule 1-A — no slacking here.

Seniors Get a Boost (If They Aren’t Too Rich)

Seniors 65+ get an extra $6,000 deduction starting with 2025 taxes, but it’s a classic case of “the more you make, the less you get.” If your modified adjusted gross income (MAGI) hits $75,000 for singles or $150,000 for joint filers, the deduction starts to phase out. So, it’s a nice carrot, but only if you’re not swimming in cash.

Below the Line, Above the Frustration

All these deductions are “below-the-line,” meaning they reduce your taxable income but don’t touch your adjusted gross income (AGI). Why care? Because AGI is king when it comes to unlocking other tax credits and breaks.

Unlike “above-the-line” deductions, which are rare unicorns that do reduce AGI, these new deductions won’t help you qualify for goodies like the earned income tax credit or child tax credit.

So, if you were dreaming of lowering your AGI to sneak into better tax breaks, this isn’t it.

Tips, But Not All Tips, Are Tax-Free Now?

The IRS and Treasury have clarified that “no tax on tips” applies to cash tips — and, yes, that includes tips paid by check, credit card, or even gift cards. Casino chips count, too. But bitcoin and most digital currencies? Nope, their fluctuating values disqualify them. Stablecoins, which are pegged to assets like the US dollar, do make the cut.

One major sting: tips automatically added by the restaurant without any customer discretion won’t qualify. Mandatory 18% service charges baked into the bill? Sorry, those are off the table. Tips must be voluntarily given by customers, no strings attached.

Which Jobs Get to Play?

Nearly 70 occupations qualify for this no-tax-on-tips break, including bartenders, pizza delivery folks, hairstylists, valet attendants, and even clowns. The IRS is still taking public comments, so this list might grow — or shrink.

Reporting Is a Must

Want the break? You have to report your tips on W-2s, 1099s, or Form 4137. The IRS caps the tip deduction at $25,000 per return. Remember, employers still withhold for Social Security and Medicare, and workers must report tips over $20 a month.

Bottom Line

This shiny new Schedule 1-A isn’t a free-for-all. It’s a complicated addition to an already complicated tax code, with plenty of restrictions and a heavy dose of “read the fine print.” If you’re planning to claim these deductions, get ready to keep detailed records and brace yourself for more IRS clarifications as 2026 tax season approaches.

In short, while these new deductions offer some relief, they come with enough hoops to make even the most diligent taxpayer groan. Taxpayers should keep a close eye on updates and consult a tax pro before getting too optimistic about the “One Big Beautiful Bill.”