Need to Know Tax › Follow-up: what changed in 2025 and still applies
The 2025 law, still running
Tips, overtime, seniors, and car loan interest: the deductions that run through 2028
The 2025 law created four deductions that did not exist before, and all four come with the standard deduction. Each has an income limit, each has fine print that decides whether you qualify, and the overtime one is the most misunderstood deduction on the return.
Four deductions were born in the 2025 tax law and all four work the same way in one important respect: you get them whether you itemize or take the standard deduction. They go on a new form, Schedule 1-A, and they come off after adjusted gross income, so they do not change AGI, which is the number most other limits and phase-outs key on. Each one has its own income limit, its own fine print, and its own way of going wrong on a W-2. All four expire after 2028 unless Congress extends them.
| Deduction | Maximum | Phase-out begins (modified AGI) | How fast it goes |
|---|---|---|---|
| Qualified tips | $25,000 | $150,000 single / $300,000 joint | $100 per $1,000 over |
| Qualified overtime (the premium only) | $12,500 / $25,000 joint | $150,000 single / $300,000 joint | $100 per $1,000 over |
| Seniors, 65 and older | $6,000 per person | $75,000 single / $150,000 joint | 6% of income over |
| Car loan interest | $10,000 | $100,000 single / $200,000 joint | $200 per $1,000 over |
All four: available with the standard deduction, claimed on Schedule 1-A, tax years 2025 through 2028. Married couples must file jointly to claim the tip, overtime and car loan deductions. The taxpayer, and the spouse on a joint return, must have a Social Security number.
Tips: up to $25,000
Who qualifies. Employees and self-employed workers in an occupation that “customarily and regularly” received tips as of December 31, 2024. The Treasury published the list: servers, bartenders, hotel and casino staff, hairdressers and barbers, drivers and delivery workers, golf caddies, movers, and so on. If your job is not on the list, the deduction is not available even if customers tip you.
What counts as a tip. Cash, card and app tips, and tips from a tip pool, as long as they are voluntary. A mandatory service charge, the automatic 18% for a party of eight, is not a tip and does not qualify. Tips have to be reported somewhere to be deducted: on your W-2, on a 1099 if you are self-employed, or on Form 4137 if your employer never saw them.
What it does not do. It is an income tax deduction only. Social Security and Medicare tax still come out of tips, and tips still count as income for everything else, including the earned income credit and the Colorado return.
Self-employed. The deduction cannot exceed the net profit of the business the tips came from. A self-employed person in a “specified service” business, a consultant or performer, for instance, does not qualify at all.
Overtime: up to $12,500, and only the premium
This is the one most people get wrong, including some payroll departments. If you earn $30 an hour and overtime pays time-and-a-half, you get $45 for an overtime hour. The deductible part is the $15 premium, not the $45. Work 400 overtime hours in a year at that wage and the deduction is $6,000, not $18,000.
It has to be overtime that federal wage law requires: hours over 40 in a week under the Fair Labor Standards Act. Overtime paid under a union contract or a state rule that goes beyond the federal one, such as daily overtime after eight hours, does not qualify for the extra part. Salaried employees who are exempt from overtime rules have no qualified overtime at all, even if their employer pays extra for long weeks.
Your employer reports the qualified amount in a new box on the 2026 W-2. For 2025 many employers did not have the box yet and reported it separately, reported the whole overtime wage, or reported nothing, which is why some 2025 returns needed a pay-stub reconstruction.
Worked example: a nurse with 300 overtime hours
A hospital nurse earns $38 an hour, works 300 hours of overtime in 2026 at time-and-a-half ($57 an hour), and files jointly with a spouse; household income is $140,000, under the phase-out. The couple is in the 22% bracket.
| The premium (correct) | The whole overtime wage (wrong) | |
|---|---|---|
| Per overtime hour | $19 | $57 |
| Times 300 hours | $5,700 | $17,100 |
| Federal tax saved at 22% | $1,254 | $3,762 |
The right-hand column is what a W-2 shows when payroll puts the full overtime wage in the new box instead of the premium. The IRS gets a copy of the W-2 and will match it, so an inflated box is a problem for the employer, but a return that claims $17,100 is a problem for the nurse. Colorado adds the deduction back (see below), so the state saves nothing either way.
Behind the scenes
When the W-2 box is blank or looks wrong, a preparer goes back to the year-end pay stub and separate the premium from the regular pay, hour by hour if necessary. Nurses, police officers, firefighters and warehouse workers with a lot of overtime are the ones for whom this is worth real money, and the ones whose payroll departments are most likely to have reported the full overtime wage instead of the premium. The tell is a box that equals roughly 1.5 times a plausible premium.
Seniors: the extra $6,000
For each person 65 or older by the end of the year; $12,000 for a couple who both qualify. This one was sold as “no tax on Social Security.” That is not what it does. The formula that taxes Social Security is untouched. What you get is a $6,000 deduction from taxable income if you are 65 or older, whether or not you receive Social Security, whether or not you itemize, and on top of the extra standard deduction for age that already existed: $2,050 for a single filer or $1,650 per spouse in 2026.
It phases out at six cents per dollar of modified AGI above $75,000 for a single filer or $150,000 joint, and is gone entirely at $175,000 for a single filer. On a joint return the $12,000 for two qualifying spouses runs out at $350,000; if only one spouse is 65, the $6,000 is gone at $250,000 (verify). You do not have to do anything to claim it; the software applies it from your date of birth. Both spouses must be 65 for the couple to get $12,000; if one is 63, it is $6,000.
Worked example: two retired couples
| Couple A | Couple B | |
|---|---|---|
| Both 65 or older, filing jointly | yes | yes |
| Modified AGI | $90,000 | $170,000 |
| Over the $150,000 line by | $0 | $20,000 |
| Reduction (6% of the excess) | $0 | $1,200 |
| Senior deduction | $12,000 | $10,800 |
| Standard deduction plus age add-on | $35,500 | $35,500 |
| Taxable income, roughly | $42,500 | $123,700 |
| Bracket the deduction comes out of | 12% | 22% |
| Federal tax saved by the senior deduction | about $1,440 | about $2,380 |
Couple B saves more in dollars because their bracket is higher, but every additional $1,000 of income costs them $60 of the deduction on top of the tax on the $1,000 itself. For a retiree doing a Roth conversion, that is an extra 1.3 points of tax on the conversion between $150,000 and $250,000, over and above the bracket.
Where it matters most. Retirees doing Roth conversions or large IRA withdrawals. The senior deduction phases out on modified AGI, so a conversion that pushes a couple past $150,000 costs part of the deduction along with everything else that keys on income: the Medicare premium tiers, the taxability of Social Security. Conversions should be sized with that line in mind, and the sizing has to be done before December 31.
Size a Roth conversion or an IRA withdrawal against the line with this.
Car loan interest: up to $10,000
The car. New, not used. Bought for personal use. Cars, SUVs, pickups, vans and motorcycles under 14,000 pounds. Final assembly in the United States, which you check by the VIN. Plenty of foreign-brand vehicles qualify and plenty of American-brand ones do not; the plant decides, not the nameplate.
The loan. Taken out after December 31, 2024, secured by the vehicle, from a lender that is not a relative. Refinancing a qualifying loan keeps the deduction. Leases do not qualify, and neither does a loan on a car used in a business.
The paperwork. The VIN goes on the return. Lenders send a statement of interest paid; for 2026 they are required to. Keep the purchase contract.
The limit, in practice. $10,000 of interest is a lot; it takes a loan of well over $100,000 to pay that in a year. For most people the deduction is the actual interest, a few hundred to a couple of thousand dollars. On a $40,000 loan at 7% the first year’s interest is about $2,700, worth roughly $600 of federal tax in the 22% bracket. It phases out above $100,000 of modified AGI single, $200,000 joint.
The Colorado side
Colorado starts its return from federal taxable income, so a federal deduction flows through to the state unless the legislature adds it back. For 2026 it added one back: the overtime deduction. It is added back on the Colorado return, so overtime pay is fully taxed by the state at 4.40%. The tips deduction flows through and reduces Colorado tax. The senior deduction and car loan interest also flow through as of this writing. In the nurse’s example above, the $5,700 deduction saves $1,254 federally and $0 in Colorado; a $5,700 tip deduction would save $1,254 federally and about $250 in Colorado.
What to bring your preparer
- Tips: your W-2 (the tip amounts are in the new boxes), or your 1099s and a tip record if you are self-employed, and your occupation as it appears on the Treasury list
- Overtime: your W-2 and, if the overtime box is blank or looks like the whole overtime wage, your final pay stub of the year showing overtime hours and rates
- Seniors: nothing extra, but make sure your preparer has both dates of birth right
- Car loan: the lender’s interest statement, the purchase contract, and the VIN
- If you are married: both spouses’ information, since three of the four require a joint return
Questions people ask
Do I still pay Social Security and Medicare tax on tips and overtime?
Yes. The deductions are for income tax only. Payroll taxes come out the same as before, and the earnings still count toward your Social Security record.
My job isn’t on the list but I get tips. Can I take the deduction?
No. The occupation has to be on the Treasury list. The list is broad, covering most of food service, hospitality, personal care, transportation and delivery, and some home services, but it is a list.
I’m 65 and still working. Do I get the senior deduction?
Yes, if your modified AGI is under the phase-out. It is not tied to retirement or to Social Security.
Can I claim these if I’m married filing separately?
The tip, overtime and car loan deductions require a joint return if you are married. The senior deduction is available on a separate return, with the single-filer phase-out.
Does the overtime deduction change my withholding?
Not automatically. Employers withhold on the full wage. If the deduction is large, a new Form W-4 can bring withholding down during the year; otherwise it arrives as a bigger refund.
Will these be around in 2029?
Not unless Congress acts. All four are written to expire after the 2028 tax year.
The W-2 decides most of it
Three of the four deductions are figured from boxes on the W-2 or the lender’s statement. If a box is blank or the number looks like the whole overtime wage rather than the premium, bring the final pay stub of the year; that is what your preparer will rebuild it from.