New Federal Deductions 2025–2028: A Complete Guide for Taxpayers and Tax Preparers

Beginning in tax year 2025, taxpayers will be able to benefit from several new deductions created under recent federal legislation. These deductions apply to both standard deduction and itemizing taxpayers, and each comes with specific limits, requirements, and income-based phaseouts.

This document provides a clear and professional explanation of four new federal deductions:

• No Tax on Tips (Qualified Tips Deduction)

• No Tax on Overtime (Deduction for Qualified Overtime Compensation)

• No Tax on Car Loan Interest (Deductible Interest for Personal Vehicle Loans)

• New Deduction for Seniors Age 65+

Each section includes definitions, requirements, and a practical example illustrating how the deduction works.

1. “No Tax on Tips” – Qualified Tips Deduction

Overview

From 2025 through 2028, employees and certain self-employed individuals may deduct qualified tips received in occupations that the IRS recognizes as “customarily and regularly receiving tips” before December 31, 2024.

Tips must be reported on:

• Form W-2

• Form 1099

• A payor-issued specified statement

• Or reported directly by the taxpayer on Form 4137 (unreported tips)

What Counts as “Qualified Tips”

• Voluntary tips paid in cash, credit card, or electronic payment

• Tips received through tip sharing or tip pooling

Deduction Limit

• Annual maximum: $25,000

• For self-employed taxpayers: cannot exceed net income from the business where the tips were earned

Phaseout

Begins when Modified Adjusted Gross Income (MAGI) exceeds:

• $150,000 for single filers

• $300,000 for married filing jointly

Restrictions

Not eligible:

• Self-employed individuals in a Specified Service Trade or Business (SSTB) under section 199A

• Employees whose employer operates as an SSTB

Taxpayer Requirements

• Must include Social Security Number on the return

• Married taxpayers must file jointly to claim the deduction

Employer Reporting Requirements

Employers or payors must:

• Report tips received

• Indicate the employee’s occupation

• File information returns with the IRS and provide statements to employees

Example

Situation:María works as a waitress and receives $18,500 in qualified tips during 2025, all reported on her W-2.

Calculation:Deduction allowed = $18,500 (below the $25,000 limit)

Result:María can deduct $18,500 from her federal taxable income.If her income was $40,000, her taxable income becomes $21,500 (before other deductions).

2. “No Tax on Overtime” – Deduction for Qualified Overtime Compensation

Overview

From 2025 to 2028, workers may deduct the extra portion of overtime pay — the amount above the regular hourly rate.This refers to the additional “half” in the required time-and-a-half overtime rate under the Fair Labor Standards Act (FLSA).

Overtime must be reported on:

• Form W-2

• Form 1099

• A payor-issued specified statement

What Counts as “Qualified Overtime”

• The required additional 50% premium above the regular hourly wage

Example:Regular pay: $20/hourOvertime pay: $30/hourQualified portion: $10/hour (the “half”)

Deduction Limit

• $12,500 for single filers

• $25,000 for joint filers

Phaseout

Begins when MAGI exceeds:

• $150,000 single

• $300,000 joint

Taxpayer Requirements

• Must include SSN

• Married taxpayers must file jointly

Employer Reporting Requirements

Employers must clearly provide:

• Total qualified overtime compensation

• Total annual amount paid

Example

Situation:Carlos earns $22/hour. Overtime rate: $33/hour.Qualified portion: $33 − $22 = $11/hourHe works 1,000 overtime hours in 2025.

Calculation:$11 × 1,000 = $11,000 qualified overtimeBelow the $12,500 limit

Result:Carlos may deduct $11,000 from his federal taxable income.

3. “No Tax on Car Loan Interest” – Personal Vehicle Loan Interest Deduction

Overview

Between 2025 and 2028, taxpayers may deduct interest paid on a loan used to purchase a new personal-use vehicle, provided specific requirements are met.

Deduction Limit

• Maximum annual deduction: $10,000

Phaseout

Begins when MAGI exceeds:

• $100,000 single

• $200,000 joint

Loan Requirements

Interest must be from a loan that:

• Originates after December 31, 2024

• Is used to purchase a vehicle with first use starting with the taxpayer

• Is for a personal-use vehicle (not business or commercial)

• Is secured by a lien on the vehicle

• Does not apply to used vehicles

• Does not apply to leased vehicles

• Refinanced loans generally remain eligible for the refinanced portion

Qualified Vehicle Requirements

The vehicle must be:

• A car, SUV, van, pickup truck, minivan, or motorcycle

• GVWR under 14,000 lbs

• Final assembly in the United States

Taxpayers may verify U.S. assembly via:

• The vehicle information label

• The VIN

• The official NHTSA VIN Decoder

Taxpayer Requirements

• Must include the VIN on the return

• Available to both standard and itemizing filers

Lender Requirements

Lenders must report:

• Total interest received during the year

• Provide a copy to the taxpayer

Example

Situation:Lucía buys a new SUV in 2025 for $38,000 with a 6% loan.She pays $2,900 in interest during 2025.MAGI: $85,000.

Calculation:Interest paid: $2,900Below the $10,000 limitBelow $100,000 MAGI threshold

Result:Lucía may deduct $2,900 from her taxable income.

4. New Senior Deduction (Age 65+)

Overview

From 2025 through 2028, taxpayers age 65 or older by the last day of the tax year may claim an additional $6,000 deduction per eligible individual.

This deduction is added on top of the current additional standard deduction for seniors.

Deduction Amount

• $6,000 per taxpayer age 65+

• $12,000 for married couples where both spouses are 65+

Phaseout

Begins when MAGI exceeds:

• $75,000 single

• $150,000 joint

Requirements

• Must be age 65 on or before the last day of the tax year

• Must include SSN

• Married taxpayers must file jointly

Example

Situation:Eduardo (67) and Teresa (70) earn a joint income of $120,000.

Calculation:Additional deduction:$6,000 + $6,000 = $12,000

Below the $150,000 phaseout threshold

Result:Their taxable income is reduced by an additional $12,000,in addition to their standard deduction.

Conclusion

These new deductions provide substantial opportunities to reduce federal tax liability between 2025 and 2028. To maximize benefits, taxpayers and preparers should:

• Maintain proper documentation

• Review income limits and phaseout rules

• Verify eligibility for each deduction

• Ensure correct reporting under new IRS guidelines