Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at questions on four new tax deductions in the "One Big Beautiful Bill." (Get a free issue of The Kiplinger Tax Letter or subscribe.)
1. Do tax breaks begin in 2025?
Question: Can taxpayers claim the new senior deduction and the write-offs for tips, overtime and interest on automobile loans, on their 2025 tax returns?
Joy Taylor: Yes, these tax breaks are available for 2025. The so-called “One Big Beautiful Bill” (OBBB) includes four brand new temporary deductions that eligible individuals can claim on their tax returns, depending on their modified adjusted gross income. These are the deductions for up to $25,000 of qualified tips, $12,500 ($25,000 on joint returns) of qualified overtime compensation, $10,000 of interest paid on loans to buy a new vehicle after 2024, and the $6,000 senior tax deduction for each person who is age 65 or older. These write-offs are temporary, first taking effect on 2025 tax returns that you file next year and ending after 2028. They are available to taxpayers who itemize on Schedule A of the Form 1040 and to filers who claim the standard deduction.
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2. Are deductions above, or below-the-line?
Question: Are the new senior deduction and the write-offs for tips, overtime and interest on automobile loans “above-the-line” or “below-the-line?”
Joy Taylor: These four deductions, which are available to itemizers and to taxpayers who claim standard deductions, are “below-the-line” deductions, meaning they are subtracted from adjusted gross income (AGI) to arrive at taxable income.
3. Modified AGI and the new tax breaks
Question: The new senior deduction, the $40,000 cap on state and local tax (SALT) deductions, and the deductions for tips, overtime and interest on automobile loans all begin to phase out once modified adjusted gross income (“modified AGI”) exceeds a certain amount. What is the definition of modified AGI for these new tax breaks?
Joy Taylor: Modified AGI is often used by the IRS to determine your eligibility for certain tax benefits or tax breaks or to determine whether you are subject to surtaxes or surcharges. True to the complexity of the federal tax code, the definition of modified AGI often differs, depending on what it is used for.
For purposes of the modified AGI thresholds for taking the five above-described deductions in the OBBB, you begin with your adjusted gross income on line 11 of your Form 1040 and add any foreign earned income exclusion, foreign housing exclusion, and any amounts excluded from gross income because they were received from sources in Puerto Rico or American Samoa.
Note that these tax breaks have different modified AGI threshold amounts:
- The $40,000 cap on state and local tax deductions claimed on Schedule A of the Form 1040 begins to phase out at modified AGI over $500,000 ($250,000 for married couples who file separate returns).
- The $6,000 deduction for people age 65 and older ($12,000 on joint returns if each spouse is 65 or older) begins to phase out at modified AGI over $150,000 on joint returns and $75,000 on other returns.
- The deductions for up to $25,000 of qualified tips and up to $12,500 ($25,000 on joint returns) of qualified overtime compensation begin to phase out at modified AGI over $300,000 on joint returns and $150,000 on other returns.
- The deduction for up to $10,000 of interest paid on automobile loans begins to phase out at modified AGI over $200,000 on joint returns and $100,000 on other returns.
For more information, see The Many Definitions of Modified Adjusted Gross Income (MAGI)
4. How does the deduction for overtime pay work?
Question: I have heard conflicting reports about the new deduction for overtime pay. What pay can be deducted? Is it the entire amount of overtime pay or just the overtime premium pay? For example, if someone is paid time-and-one-half for overtime, can the taxpayer deduct the full time-and-one-half pay or only the 50% extra amount?
Joy Taylor: The OBBB offers a brand-new deduction for up to $12,500 ($25,000 on joint returns) of qualified overtime compensation. This tax break is available for eligible taxpayers who claim the standard deduction and for those who itemize on Schedule A of the Form 1040. It is a temporary deduction, first taking effect on 2025 tax returns filed next year and ending after 2028. The write-off begins to phase out at modified AGI over $300,000 on joint returns and $150,000 on other returns.
The new statute defines the term “qualified overtime compensation” as overtime paid to an individual under Section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate at which the individual is employed. So that means only the portion above the worker's regular rate qualifies for the deduction (meaning the extra 50% for employees who get one-and-one-half their regular pay rate for overtime pay). Employers must report overtime pay on Form W-2 (or Form 1099 for contractors).
This new tax break requires guidance from the IRS, and it is expected that the guidance will describe in more detail exactly what pay is considered qualified overtime compensation. In the meantime, I have included below an excerpt from a report by the staff of the bipartisan congressional Joint Committee on Taxation, that describes the Fair Labor Standards Act of 1938 for this purpose.
The Fair Labor Standards Act of 1938 (“FLSA” or the “Act”) provides for the payment of overtime pay. Under present law, employers generally must pay covered, non-exempt employees at least one-and-a-half times their “regular rate” of pay for hours worked over 40 hours a week at a given job (“overtime compensation”). The amount of overtime pay is based on the employee’s regular rate of pay and the number of hours worked in a workweek. Because earnings may be determined on a piece-rate, salary, commission, or some other basis and the FLSA does not provide for how work hours are scheduled, the determination of the regular rate of pay is based upon the actual facts of the individual’s job and work schedule (as well as certain other rules) and is calculated by dividing the total pay for employment (except for certain statutory exclusions such as the premium portion of overtime compensation) in any workweek by the total number of hours actually worked. The regular rate of pay includes all remuneration for employment, except certain payments excluded by the Act. The FLSA covers employees and enterprises engaged in interstate commerce. The FLSA covers most, but not all, private and public sector employees. There are a number of exemptions from the overtime requirements, including a broad exemption for executive, administrative, professional, computer and outside sales employees that narrows the individuals who are eligible to receive overtime compensation.
About Ask the Editor, Tax Edition
Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about tax topics. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)
We have already received many questions from readers on tax changes in the OBBB. In this column, we have addressed questions on four new tax breaks for individuals. We will answer more queries on the OBBB in future Ask the Editor round-ups. So keep those questions coming!
Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.
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