Leonard J. Andorfer & Co., LLP - Certified Public Accountants

The Internal Revenue Service have issued guidance for workers eligible to claim the deduction for tips and for overtime compensation for tax year 2025. Specifically, the IRS clarified for workers how to determine the amount of their deduction without receiving a separate accounting from their employer for cash tips or qualified overtime on information returns such as Form W-2 or Form 1099, as those forms remain unchanged for the current tax year. It also provides transition relief to workers who receive tips in the course of a specified service trade or business.

No Tax on Tips

Under the One, Big, Beautiful Bill, workers may be eligible for new deductions for tax years 2025 through 2028 if they received qualified tips. For tipped workers, the maximum annual deduction is $25,000, which phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

It is estimated that there are about 6 million workers who report tipped wages.

Examples of how the rules work for tipped employees

The IRS provided some examples to illustrate various situations tipped employees might encounter; below are abridged versions of some of those examples.

Waiter with reported tips in box 7, Form W-2

Ann is a restaurant server whose 2025 Form W-2, box 7 reports $18,000 of social security tips. Ann did not report any additional tips on Form 4137. Ann may use $18,000 in determining the amount of her qualified tips for tax year 2025.

Bartender with additional reported tips on Form 4137

Bob is a bartender who reports $20,000 in tips to his employer during the 2025 tax year on Forms 4070 and reports $4,000 of unreported tips on Form 4137, line 4. Bob’s 2025 Form W-2 reports $200,000 in box 1 and $15,000 in box 7. Bob may use either the $15,000 in box 7 of the Form W-2, or the $20,000 of tips reported to Bob’s employer on Forms 4070 in determining the amount of qualified tips for tax year 2025. Regardless of the option chosen, Bob may also include the $4,000 of unreported tips from Form 4137, line 4 in determining the amount of qualified tips.

Self-employed travel guide

Doug is a self-employed travel guide who operates as a sole proprietor. In 2025, Doug receives $7,000 in tips from customers paid through a third-party settlement organization (TPSO). For tax year 2025, Doug receives a Form 1099-K from the TPSO showing $55,000 of total payments. The Form 1099-K does not separately identify the tips. However, Doug keeps a log of each tour that shows the date, customer, and tip amount received. Because Doug has daily tip logs substantiating the $7,000 tip amount, he may use the $7,000 tip amount in determining qualified tips for tax year 2025.

No Tax on Overtime

For tax years 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay (generally, the “half” portion of “time-and-a-half” compensation) that is required by the Fair Labor Standards Act and reported on a Form W-2, Form 1099, or other statement furnished to the individual.

• Maximum annual deduction is $12,500 ($25,000 for joint filers).
• Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

The deduction is available for both itemizing and non-itemizing taxpayers.

Certain employees are exempt from the rules on overtime

Generally, the FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half their regular rate of pay for all hours worked over 40 in a workweek. However, the law provides for certain exemptions.

The IRS provided a series of examples illustrating situations that workers who receive qualified overtime might encounter. The IRS guidance does not affect any rights or responsibilities regarding tips or overtime compensation under the FLSA. Below are abridged versions of some of those examples.

Overtime examples

Andrew works overtime during 2025, and he receives a payroll statement from his employer that shows $5,000 as the “overtime premium” that he was paid during 2025. Andrew may include $5,000 (the FLSA overtime premium) to determine the amount of qualified overtime compensation received in tax year 2025.

Assume the same facts as in the first example except that Andrew’s payroll statement shows a total “overtime” amount of $15,000, which is the total amount Andrew was paid for working overtime (the FLSA overtime premium combined with the portion of his regular wages). Andrew may include the $5,000 FLSA overtime premium, computed by dividing $15,000 by 3 in determining the amount of qualified overtime compensation for 2025.

Brad’s employer has a practice of paying overtime at a rate of two times an employee’s regular rate of pay, and Brad was paid $20,000 in overtime pay during 2025. Brad’s last pay stub for 2025 shows “overtime” of $20,000 paid in 2025. For purposes of determining the amount of qualified overtime compensation received in tax year 2025, Brad may include $5,000 ($20,000 divided by 4).

Carol is a covered, nonexempt employee under the FLSA and works in law enforcement and is paid $15,000 of overtime pay on a “work period” basis of 14 days that complies with the FLSA. For purposes of determining the amount of qualified overtime compensation received in tax year 2025, Carol may include $5,000 ($15,000 divided by 3).

Diane works for a State or local government agency that gives compensatory time at a rate of one and one-half hours for each overtime hour worked. In 2025, Diane was paid wages of $4,500 for compensatory time off based on that overtime. To determine the amount of qualified overtime compensation received in tax year 2025, Diane may include $1,500, one-third of these wages, for purposes of determining the qualified overtime compensation deduction.

The Internal Revenue Service has announced that the amount that individuals can contribute to their 401(k) plans, 403(b) plans, governmental 457 plans, and the federal government’s Thrift Savings Plan plans in 2026 has increased to $24,500, up from $23,500 for 2025.

The limit on annual contributions to an IRA is increased to $7,500 from $7,000. The IRA catch‑up contribution limit for individuals aged 50 and over was amended under the SECURE 2.0 Act of 2022 (SECURE 2.0) to include an annual cost‑of‑living adjustment is increased to $1,100, up from $1,000 for 2025.

The catch-up contribution limit that generally applies for employees aged 50 and over who participate in most 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan is increased to $8,000, up from $7,500 for 2025. Therefore, participants in most 401(k), 403(b), governmental 457 plans and the federal government’s Thrift Savings Plan who are 50 and older generally can contribute up to $32,500 each year, starting in 2026. Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in these plans. For 2026, this higher catch-up contribution limit remains $11,250 instead of the $8,000 noted above.

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the Saver’s Credit all increased for 2026.

You can deduct contributions to a traditional IRA if you meet certain conditions. If during the year either you or your spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither you nor your spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase‑out ranges for 2026:

• For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $81,000 and $91,000, up from between $79,000 and $89,000 for 2025.
• For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $129,000 and $149,000, up from between $126,000 and $146,000 for 2025.
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $242,000 and $252,000, up from between $236,000 and $246,000 for 2025.
• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.

Other phase-out ranges and limitations

The IRS also announced limitations for 2026 for Roth IRAs, the Saver’s Credit and SIMPLE retirement accounts.

• The income phase-out range for people making contributions to a Roth IRA is increased to between $153,000 and $168,000 for singles and heads of household, up from between $150,000 and $165,000 for 2025. For married couples filing jointly, the income phase-out range is increased to between $242,000 and $252,000, up from between $236,000 and $246,000 for 2025. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
• The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $80,500 for married couples filing jointly, up from $79,000 for 2025; $60,375 for heads of household, up from $59,250 for 2025; and $40,250 for singles and married individuals filing separately, up from $39,500 for 2025.
• The amount individuals can generally contribute to their SIMPLE retirement accounts is increased to $17,000, up from $16,500 for 2025. Pursuant to a change made in SECURE 2.0, individuals can contribute a higher amount to certain applicable SIMPLE retirement accounts. For 2026, this higher amount is increased to $18,100, up from $17,600 for 2025.
• The catch-up contribution limit that generally applies for employees aged 50 and over who participate in most SIMPLE plans is increased to $4,000, up from $3,500 for 2025. Under a change made in SECURE 2.0, a different catch-up limit applies for employees aged 50 and over who participate in certain applicable SIMPLE plans, which remains $3,850. Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in SIMPLE plans, which remains $5,250.

No tax on overtime

• Starting January 1, 2025, a designated amount of qualifying overtime pay will be exempt from federal income tax under the One Big Beautiful Bill Act (OBBBA).
• You can deduct up to $12,500 (for most filers) or $25,000 (Married Filing Jointly) in overtime pay from your taxable income.
• The tax benefit phases out for higher earners, starting at $150,000 (Single) or $300,000 (Married Filing Jointly).
• You must be a non-exempt W-2 employee and your overtime must meet federal labor standards.

No tax on tips

• Deduction, Not Elimination: Tips are still considered income and remain subject to Social Security and Medicare payroll taxes. The new law allows eligible workers to claim an above-the-line deduction of up to $25,000 in reported tops from their federal taxable income.
• Eligibility Requirements:
  • Qualifying Occupations: The deduction is limited to specific occupations that customarily and regularly received tips before 2025 (e.g., waiters, bartenders, housekeepers, certain drivers). The IRS published a list of 68 eligible job categories in September 2025.
  • Income Limits: The deduction amount begins to phase out for taxpayers with a modified adjusted gross income (MAGI) over $150,000 (single filers) or $300,000 (married couples filing jointly).
  • Reporting: Only tips that are reported to the employer (or reported by the taxpayer on IRS Form 4137) quality for the deduction.
• Types of Tips Covered: “Qualified tips” include cash, checks, and electronic payments (credit card, payment apps, etc.) that are given voluntarily by a customer. Mandatory service charges do not qualify.
• Timeframe: The deduction is a temporary provision, applying to tax years 2025 through 2028.
• State and Local Taxes: This law only affects federal income tax. Tips may still be subject to state and local income taxes depending on where the worker lives.

Senior deduction

Under the act, individuals who are age 65 and older may claim a deduction of $6,000 in 2025 through 2028. The $6,000 amount is per person — so married couples can claim a $12,000 deduction if they both qualify. However, the deduction phases out for taxpayers with modified adjusted gross income (MAGI) over $75,000 ($150,000 for joint filers). To qualify, a taxpayer must turn 65 on or before the last day of the tax year. This new deduction is in addition to the current additional standard deduction for seniors of $1,600, or $2,000 if the individual is unmarried and not a surviving spouse.

Because the extra senior deduction was created as a substitute for a “no tax on Social Security” promise that could not be adopted under the budget reconciliation rules that governed the passage of the act, clients may think they have to be receiving Social Security benefits to take the deduction, but they do not. Individuals age 65 and older can claim the deduction even if they haven’t started taking Social Security. On the other hand, individuals between the ages of 62 and 64 are not eligible for the deduction, even if they have started receiving Social Security benefits.

SALT cap

For 2025, the limit on the federal deduction for state and local taxes (the SALT cap) increases to $40,000 ($20,000 for married taxpayers filing separately) from the previous $10,000. The amount of the deduction available to a taxpayer is reduced by 30% of the amount the taxpayer’s MAGI exceeds $500,000 ($250,000 for married taxpayers filing separately), but the phaseout stops when the deduction reaches $10,000 ($5,000 for married taxpayers filing separately). The act did not limit the various workarounds that states have enacted and taxpayers are currently using to avoid the SALT cap.

Car loan interest

The act allows individuals to deduct up to $10,000 in interest paid on a loan used to purchase a qualified vehicle, but various restrictions embedded in the provision may prove a trap for the unwary client (including a phaseout beginning at $100,000 of MAGI ($200,000 for married taxpayers filing jointly)).

To qualify for the deduction, the interest must be paid on a loan that is originated after Dec. 31, 2024; used to purchase a vehicle, the original use of which starts with the taxpayer (used vehicles do not qualify); for a personal-use vehicle (not for business or commercial use); and secured by a first lien on the vehicle. A qualified vehicle is a car, minivan, van, SUV, pickup truck, or motorcycle with a gross vehicle weight rating of less than 14,000 pounds that has undergone final assembly in the United States, among other requirements.

Finally, for many eligible clients, the interest deduction will not outlast the car loan; the provision is set to expire after 2028.

Child tax credit

The nonrefundable child tax credit was permanently increased to $2,200 per child. The additional child tax credit (the refundable child tax credit) of $1,400, adjusted for inflation, was also made permanent. The additional child tax credit after adjustment for inflation is $1,700 for 2025. The credit starts to phase out at MAGI of $200,000 ($400,000 in the case of a joint return). There is also a $500 nonrefundable credit available for each dependent of the taxpayer other than a qualifying child. As formerly, Social Security numbers must be shown on the return for each child for whom the credit is being claimed.

Bonus depreciation

The allowance is increased to 100% for property acquired and placed in service on or after Jan. 19, 2025, as well as for specified plants planted or grafted on or after Jan. 19, 2025. Property placed in service in the first 18 days of 2025 is subject to the former, reduced rate of 40% in effect before the enactment of the act.

Sec. 179

For property placed in service in 2025, the maximum amount a taxpayer may expense under Sec. 179 is $2.5 million, reduced by the amount by which the cost of the qualifying property exceeds $4 million. The $2.5 million and $4 million amounts are adjusted for inflation for tax years beginning after 2025.

R&D

The act allows taxpayers to immediately deduct domestic research or experimental expenditures paid or incurred in tax years beginning after Dec. 31, 2024. However, research or experimental expenditures attributable to research that is conducted outside the United States will continue to be required to be capitalized and amortized over 15 years under Sec. 174.

Small business taxpayers with average annual gross receipts of $31 million or less (other than a tax shelter) can retroactively apply this change to tax years beginning after Dec. 31, 2021. In addition, all taxpayers that made domestic research or experimental expenditures in tax years beginning after Dec. 31, 2021, and before Jan. 1, 2025, can elect to accelerate the remaining unamortized deductions for those expenditures over a one- or two-year period.

Sec. 163(j)

The act changed the definition of adjusted taxable income (ATI) under Sec. 163(j) for tax years beginning after Dec. 31, 2024, permanently excluding depreciation, depletion, and amortization from the computation of ATI. The act also amended the definition of “motor vehicle” to allow interest on floor plan financing for certain trailers and campers to be deductible.

Small business stock

The act modified the Sec. 1202 exclusion for gain from qualified small business stock (QSBS) by providing a tiered gain exclusion for QSBS acquired after July 4, 2025. For QSBS acquired after that date and held for three years, 50% of the gain will be excluded from gross income. If the QSBS is held for four years, the exclusion rises to 75%. If the QSBS is held for five years or more, 100% of the gain will be excluded from income.

Farmland sales

The act created a new Sec. 1062 that allows income tax resulting from the sale of qualified farmland property to a qualified farmer to be paid in four installments. The new section applies to sales or exchanges in tax years beginning after July 4, 2025. (So, for calendar-year taxpayers, it will not apply until 2026.)

Recent legislation retroactively reinstated the reporting threshold in effect prior to the passage of the American Rescue Plan Act of 2021 (ARPA) so that third party settlement organizations are not required to file Forms 1099-K unless the gross amount of reportable payment transactions to a payee exceeds $20,000 and the number of transactions exceeds 200.

Form 1099-K is an IRS information return used to report certain payments to improve voluntary tax compliance. The requirement to file a Form 1099-K can be triggered when payments are received for goods or services through a payment settlement entity.

If you you have questions about whether you are required to file Form 1099-K, please contact our office to schedule a consultation.

The Internal Revenue Service has announced the tax year 2026 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes.

Notable changes

The tax year 2026 adjustments described below generally apply to tax returns filed in 2027. Of particular interest to many taxpayers:

• Standard Deduction. For tax year 2026, the standard deduction increases to $32,200 for married couples filing jointly. For single taxpayers and married individuals filing separately, the standard deduction rises to $16,100 for tax year 2026, and for heads of households, the standard deduction will be $24,150.

  Additionally, for tax year 2025, recent legislation raises the standard deduction amount to $31,500 for married couples filing jointly. For single taxpayers and married individuals filing separately, the standard deduction for 2025 is $15,750, and for heads of households, the standard deduction is $23,625.

• Marginal Rates: For tax year 2026, the top tax rate remains 37% for individual single taxpayers with incomes greater than $640,600 ($768,700 for married couples filing jointly). The other rates are:

  • 35% for incomes over $256,225 ($512,450 for married couples filing jointly);
  • 32% for incomes over $201,775 ($403,550 for married couples filing jointly);
  • 24% for incomes over $105,700 ($211,400 for married couples filing jointly);
  • 22% for incomes over $50,400 ($100,800 for married couples filing jointly);
  • 12% for incomes over $12,400 ($24,800 for married couples filing jointly).

  The lowest rate is 10% for incomes of single individuals with incomes of $12,400 or less ($24,800 for married couples filing jointly).

• Alternative Minimum Tax Exemption Amounts. For tax year 2026, the exemption amount for unmarried individuals is $90,100 and begins to phase out at $500,000 ($140,200 for married couples filing jointly for whom the exemption begins to phase out at $1,000,000).

• Estate Tax Credits. Estates of decedents who die during 2026 have a basic exclusion amount of $15,000,000, up from a total of $13,990,000 for estates of decedents who died in 2025.

• Adoption Credits. The maximum credit allowed for adoptions for tax year 2026 is the amount of qualified adoption expenses up to $17,670, up from $17,280 for 2025. For tax year 2026, the amount of credit that may be refundable is $5,120.

• Employer-Provided Childcare Tax Credit. For tax year 2026, recent legislation enhances an important credit for employers; it increases the maximum amount of employer-provided childcare tax credit from $150,000 to $500,000 ($600,000 if the employer is an eligible small business).

Other notable items affected by indexing

• Earned Income Tax Credits. The tax year 2026 maximum Earned Income Tax Credit (EITC) amount is $8,231 for qualifying taxpayers who have three or more qualifying children, up from $8,046 for tax year 2025. Revenue Procedure 2025-32 contains a table providing maximum EITC amount for other categories, income thresholds and phase-outs.

• Qualified Transportation Fringe Benefit. For tax year 2026, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $340, up $15 from 2025.

• Health Flexible Spending Cafeteria Plans. For tax years beginning in 2026, the dollar limitation for voluntary employee salary reductions for contributions to health flexible spending arrangements increases to $3,400, up $100 from prior year. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $680, an increase of $20 from tax years beginning in 2025.

• Medical Savings Accounts. For tax year 2026, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,900, up $50 from tax year 2025 – but not more than $4,400, an increase of $100 from tax year 2025. For self-only coverage, the maximum out-of-pocket expense amount is $5,850, up $150 from 2025. For tax year 2026, for family coverage, the annual deductible is not less than $5,850, up from $5,700 for 2025; however, the deductible cannot be more than $8,750, up $200 from the limit for tax year 2025. For family coverage, the out-of-pocket expense limit is $10,700 for tax year 2026, an increase of $200 from tax year 2025.

• Foreign Earned Income Exclusion. For tax year 2026, the foreign earned income exclusion is $132,900 up from $130,000 for tax year 2025.

• Annual Exclusion for Gifts. For tax year 2026, the annual exclusion for gifts remains at $19,000. (However, the annual exclusion for gifts to a spouse who is not a citizen of the United States increases to $194,000 for calendar year 2026, up $4,000 from calendar year 2025.)

Items unaffected by indexing

By statute, certain items that were indexed for inflation in the past are currently not adjusted.

• Personal Exemptions. For tax year 2026, personal exemptions remain at 0, as in tax year 2025. The elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act of 2017 and was made permanent by recent legislation. (The personal exemption described here does not include the newly enacted senior deduction.)

• Itemized Deductions. The limitation on itemized deductions was previously eliminated for tax years 2018 – 2025. The elimination of the limitation was made permanent by recent legislation, although it imposes a limitation on the tax benefit from itemized deductions for those taxpayers in the highest tax bracket (37%).

• Lifetime Learning Credits. The modified adjusted gross income (MAGI) amount used to phase out the Lifetime Learning Credit has not been adjusted for inflation for tax years beginning after Dec. 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with MAGI between $80,000 and $90,000 ($160,000 and $180,000 for joint returns).

The IRS issued final regulations on September 15 addressing the new Roth IRA catch-up contribution rule enacted as part of the SECURE 2.0 Act in December 2022. These final regulations generally follow the proposed regulations issued in January 2025, with some changes made in response to comments the IRS received. The new rule generally requires all catch-up contributions to be made on a Roth basis for employees with wages exceeding $145,000.

Catch-up contributions are additional elective deferrals that participants 50 or older can make to certain tax-favored retirement plans, such as 401(k), 403(b) and governmental 457(b) plans, in excess of the otherwise applicable limits. The limit on catch-up contributions is indexed for inflation and reached $7,500 in 2025.

Before SECURE 2.0, catch-up contributions could be made on either a pre-tax or Roth basis (if permitted by the plan sponsor), and all eligible participants under the plan generally had to be allowed to make the same elections. SECURE 2.0 made several changes to the rules, including requiring catch-up contributions to be made on a Roth basis for participants whose wages from the employer for the preceding calendar year exceeded $145,000 (indexed for inflation).

In addition, SECURE 2.0 provides that if a plan allows an eligible participant who is subject to the new rule to make catch-up contributions on a Roth basis, then eligible participants who are not subject to the new rule must be permitted to make catch-up contributions on either a pre-tax or Roth basis. These two changes are collectively referred to as the “new Roth catch-up contribution rule.”

The final regulations also address certain other changes made by SECURE 2.0 to the catch-up contribution rules, including the increase in the applicable dollar catch-up limit in the case of an eligible participant who attains age 60, 61, 62 or 63 during a tax year beginning after 2024. The increased limit is 150% of the otherwise applicable dollar limit for the tax year, or $11,250 for 2025).

As originally enacted, the new Roth catch-up contribution rule was scheduled to be effective for tax years beginning in 2024. However, in August 2023 the IRS issued a notice to administratively delay the effective date for two years, until 2026, to facilitate an orderly transition for compliance with the new rule. The IRS also indicated that plan sponsors could elect to begin applying the proposed regulations with respect to contributions in tax years beginning in 2024, the original statutory effective date.

The final regulations generally apply to catch-up contributions made in tax years beginning in 2027, but they do not extend or modify the administrative transition period. As a result, all plans that allow eligible participants to make catch-up contributions must begin to comply with the new rule no later than the 2026 tax year. Prior to the applicability date of the final regulations — the 2026 tax year, or the 2024 or 2025 tax year for plan sponsors that adopted the new rules earlier than required — the IRS said a reasonable, good-faith interpretation standard applies with respect to the statutory provisions reflected in the final regulations.

It’s back to school season, and with that comes potential out-of-pockets costs for educators. The Educator Expense Deduction lets eligible teachers and administrators deduct certain expenses from their taxes.

Eligible educators

To qualify, you must be a kindergarten through grade 12 teacher, instructor, counselor, principal or aide and work at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.

About this deduction

If you qualify, you can deduct up to $300 of certain trade or business expenses that weren’t reimbursed by their employer, grant or other source. If two married educators are filing a joint return, the limit rises to $600. These taxpayers can’t deduct more than $300 each.

If you qualify, qualified expenses are amounts that you paid yourself during the tax year.

Some of the expenses an educator can deduct include:

• Professional development course fees
• Books and supplies
• Computer equipment, including related software and services
• Other equipment and materials used in the classroom

Last month we took a look at all of the changes introduced by the passage of Public Law 119-21 (commonly known as the One Big Beautiful Bill Act). There were a lot of details in our summary, and some of them were easy to overlook. So this month we’re going to shine a spotlight on some of the changes to deductions that will affect many individual tax filers.

“No Tax on Tips”

• New deduction: Effective for 2025 through 2028, employees and self-employed individuals may deduct qualified tips received in occupations that are listed by the IRS as customarily and regularly receiving tips on or before December 31, 2024, and that are reported on a Form W-2, Form 1099, or other tax forms.
  • “Qualified tips” are voluntary cash or charged tips received from customers or through tip sharing.
  • Maximum annual deduction is $25,000; for self-employed, deduction may not exceed the person’s net income (without regard to this deduction) from the trade or business in which the tips were earned.
  • Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
• Eligibility: Deduction is available for both itemizing and non-itemizing taxpayers.
  • Self-employed individuals in a Specified Service Trade or Business (SSTB) under section 199A are not eligible. Employees whose employer is in an SSTB also are not eligible.
  • Taxpayers must:
    • include their Social Security Number on the return and
    • file jointly if married, to claim the deduction.

“No Tax on Overtime”

• New deduction: Effective for 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay – for example, the “half” portion of “time-and-a-half” compensation – that is required by the Fair Labor Standards Act (FLSA) and that is reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.
  • Maximum annual deduction is $12,500 ($25,000 for joint filers).
  • Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
• Eligibility: Deduction is available for both itemizing and non-itemizing taxpayers.
  • Taxpayers must:
    • include their Social Security Number on the return and
    • file jointly if married, to claim the deduction.

“No Tax on Car Loan Interest”

• New deduction: Effective for 2025 through 2028, individuals may deduct interest paid on a loan used to purchase a qualified vehicle, provided the vehicle is purchased for personal use and meets other eligibility criteria. (Lease payments do not qualify.)
  • Maximum annual deduction is $10,000.
  • Deduction phases out for taxpayers with modified adjusted gross income over $100,000 ($200,000 for joint filers).
• Qualified interest: To qualify for the deduction, the interest must be paid on a loan that is:
  • originated after December 31, 2024,
  • used to purchase a vehicle, the original use of which starts with the taxpayer (used vehicles do not qualify),
  • for a personal use vehicle (not for business or commercial use) and
  • secured by a lien on the vehicle.
• Qualified vehicle: A qualified vehicle is a car, minivan, van, SUV, pick-up truck or motorcycle, with a gross vehicle weight rating of less than 14,000 pounds, and that has undergone final assembly in the United States.
• Final assembly in the United States: The location of final assembly will be listed on the vehicle information label attached to each vehicle on a dealer’s premises. Alternatively, taxpayers may rely on the vehicle’s plant of manufacture as reported in the vehicle identification number (VIN) to determine whether a vehicle has undergone final assembly in the United States.
• Taxpayer eligibility: Deduction is available for both itemizing and non-itemizing taxpayers.

Deduction for Seniors

• New deduction: Effective for 2025 through 2028, individuals who are age 65 and older may claim an additional deduction of $6,000. This new deduction is in addition to the current additional standard deduction for seniors under existing law.
  • The $6,000 senior deduction is per eligible individual (i.e., $12,000 total for a married couple where both spouses qualify).
  • Deduction phases out for taxpayers with modified adjusted gross income over $75,000 ($150,000 for joint filers).
• Qualifying taxpayers: To qualify for the additional deduction, a taxpayer must attain age 65 on or before the last day of the taxable year.
• Eligibility: Deduction is available for both itemizing and non-itemizing taxpayers.
  • Taxpayers must:
    • include the Social Security Number of the qualifying individual(s) on the return, and
    • file jointly if married, to claim the deduction.

You have probably heard of the “One Big Beautiful Bill Act” which recently passed Congress and was signed by the President. This law has far-reaching effects in taxation for individuals, businesses, and beyond. This month we’re taking a close look at the key changes, so that you can see how you might be affected by them.

In this article, we take a close look at provisions of the act that fall outside of individual and business taxation.

International provisions

Foreign tax credit limitation: The act treats deductions of a U.S. shareholder allocable to income in the global intangible low-tax income (GILTI) category as allocable to “net CFC tested income” (which is what the act turns GILTI into, see below).

Deemed paid credit: The act amends Sec. 960(d)(1) to increase the deemed paid credit for Subpart F inclusions from 80% to 90%.

GILTI and FDII: The act decreases the Sec. 250 deduction percentage for tax years beginning after Dec. 31, 2025, to 33.34% for foreign-derived intangible income (FDII) and 40% for GILTI, resulting in an effective tax rate of 14% for both FDII and GILTI. The act also proposes changing the definition of deduction-eligible income for purposes of determining FDII. The act also eliminates the use of a corporation’s deemed tangible income return for determining FDII and the use of net deemed tangible income return in determining GILTI. These changes result in the elimination of the terms FDII and GILTI, which will be renamed “foreign-derived deduction eligible income” and “net CFC tested income,” respectively.

BEAT: The act increases the base-erosion and anti-abuse tax (BEAT) rate from 10% to 10.5%.

Business interest limitation: The act provides that the Sec. 163(j) business interest limitation will be calculated prior to the application of any interest capitalization provision.

Administrative provisions and excise taxes

Third-party network transaction reporting threshold: The act reverts to the prior rule for Form 1099-K reporting, under which a third-party settlement organization is not required to report, unless the aggregate value of third-party network transactions with respect to a participating payee for the year exceeds $20,000 and the aggregate number of such transactions with respect to a participating payee exceeds 200. The threshold had been phasing down and was scheduled to be $600 starting next year.

Form 1099 reporting threshold: The act increases the information-reporting threshold for certain payments to persons engaged in a trade or business and payments of remuneration for services to $2,000 in a calendar year (from $600), with the threshold amount to be indexed annually for inflation in calendar years after 2026.

Firearms transfer tax: The act reduces the Sec. 5811 transfer tax on certain firearms.

Farmland sales: The act adds a new Sec. 1062 that allows income tax resulting from the sale of farmland to a qualified farmer to be paid in four annual installments.

Remittance transfer tax: The act imposes a 1% tax on “remittance transfers,” imposed on the sender. A remittance transfer for these purposes is a transfer of cash, a money order, a cashier’s check, or similar physical instrument. It does not include funds withdrawn from an account held with a financial institution or charged to a credit or debit card.

Under Section 919(g) of the Electronic Fund Transfer Act, a remittance transfer is an electronic transfer of funds requested by a sender to a designated recipient that is initiated by a remittance transfer provider. A remittance transfer provider is any person or financial institution that provides remittance transfers for consumers in the normal course of its business, whether or not the consumer holds an account with the financial institution.

Employee retention credit enforcement: The act requires employee retention credit (ERC) promoters to comply with due diligence requirements with respect to a taxpayer’s eligibility for (or the amount of) an ERC. The act applies a $1,000 penalty for each failure to comply. It also extends the penalty for excessive refund claims to employment tax refund claims. It also prevents the IRS from issuing any additional unpaid claims under Sec. 3134, unless a claim for a credit or refund was filed on or before Jan. 31, 2024.

SSN requirements: The act imposes an SSN requirement for claiming an American opportunity or lifetime learning credit under Sec. 25A.