The One Big Beautiful Bill's Four New Deductions Leave Your AGI Alone and End After 2028

For tax years 2025 through 2028 (the returns filed in 2026 through 2029), the One Big Beautiful Bill Act adds four federal deductions: up to $25,000 of reported tips, $12,500 of overtime premium pay ($25,000 on a joint return), $10,000 of car-loan interest, and $6,000 for each filer aged 65 or older. All four are claimed on the new Schedule 1-A, with the standard deduction or with itemized deductions, and none of them lowers adjusted gross income.

The law itself is Public Law 119-21, signed July 4, 2025, after passing as H.R. 1 of the 119th Congress. Beyond the four deductions, its consumer provisions rewrote figures that ride existing forms: a $40,400 state and local tax deduction cap for 2026, a $2,200 child tax credit and a $15,000,000 estate and gift exclusion, both 2026 figures, and no expiration date left on the bracket schedule. The IRS keeps its implementation guidance on a single landing page; the sections below give each change its mechanism and its end date.

One new form, and AGI never moves

Schedule 1-A runs six parts: your modified AGI in Part I, then tips, overtime, car-loan interest, and the senior deduction in Parts II through V, each with its phase-out worked on the form. Line 38 totals them and sends the result to Form 1040 line 13b, beside the standard deduction and the QBI deduction, below the line where AGI has already been settled.

Placement decides what these deductions can and cannot do. They lower taxable income, so each dollar pays off at your bracket rate. They leave AGI exactly where it was, so every figure computed from AGI or a modified AGI, from the taxable share of Social Security benefits to Medicare's income-related premium surcharges, is unchanged. The first version of this overview called all of these above-the-line deductions that reduce AGI directly; that was wrong, and the fix is logged at Corrections.

Two conditions gate the form. Every claimant needs a valid Social Security number, and a married worker claiming the tips, overtime, or senior deduction must file jointly; filing separately zeroes those three. The car-loan deduction asks instead for the vehicle identification number on the return.

The caps, and the incomes where each deduction dies

All four phase out on modified AGI, which for anyone not claiming the foreign earned income or US-possession exclusions is plain AGI. The caps and thresholds are not indexed for inflation, so the same lines hold for all four years:

Three formulas produce the endpoints. Tips and overtime each shrink by $100 for every $1,000 of MAGI above the threshold (§§224(b)(2), 225(b)(2)). Car-loan interest falls twice as fast, $200 per $1,000 over $100,000. The senior deduction loses 6% of the excess over $75,000 ($150,000 joint), per person, which is why a couple's deduction ends at $250,000 whether one spouse qualifies or two. The overtime cap doubles on a joint return; the tip and car-loan caps do not.

Where each deduction narrows

The caps describe the ceiling; the definitions decide who gets anything at all.

• Tips must be voluntary, reported, and earned in an occupation on the IRS's list of jobs that customarily received tips; an automatic 18% party charge is not voluntary, so it is wages whatever the receipt calls it. The occupation list, the $2,237.50 a $65,000 bartender saves on a 2025 return, and the pay-stub rules for that first year are in the tips and overtime deep dive.
• Overtime counts only the premium half the Fair Labor Standards Act requires. A $30-an-hour worker paid $45 for an overtime hour deducts the $15, and a salaried employee exempt from the FLSA deducts nothing, however long the weeks run.
• Car-loan interest requires a new vehicle, final assembly in the United States, a gross vehicle weight rating under 14,000 pounds, and a loan originated after December 31, 2024; a used vehicle qualifies for nothing, and a lease is not a loan. Treasury's rules for the final-assembly test and the models that pass it are in the car-loan article.
• The senior deduction stacks on the standard deduction and the age-65 addition rather than replacing either; the full 2026 stack, $24,150 for a single 65-year-old, is computed in the senior deduction article.

A $40,400 SALT cap, for itemizers only

The state and local tax deduction kept its home on Schedule A, so this change reaches only filers whose itemized deductions beat the $16,100 standard deduction. §70120 of the Act rewrote §164(b)(7): a $40,000 cap for tax year 2025, $40,400 for 2026, and 1% more each year through 2029. Above $505,000 of MAGI the 2026 cap falls by 30 cents per dollar until it hits a $10,000 floor, and for taxable years from 2030 on, the cap is a flat $10,000 with no expiration attached. Which states' tax bills reach the cap, and the 45.5% marginal band the phase-down creates, are in the SALT cap article.

A Trump Account defers tax; it deducts nothing

The Act's child savings account is the one headline item that is not a deduction. §530A defines a Trump Account as a traditional IRA for a child: contributions are capped at $5,000 a year across all contributors (indexed after 2027), none of it deductible, and the Treasury seeds accounts for children born 2025 through 2028 who are US citizens with Social Security numbers with a one-time $1,000. Growth is tax-deferred, and distributions, allowed from the calendar year the child turns 18, are taxed as ordinary income under IRA rules. The early "tax-free savings" framing was wrong, ours included; the Trump Accounts article has the corrected arithmetic and the 529 comparison.

What the Act made permanent

The four deductions are temporary. The structure underneath them no longer is. §70101 struck the TCJA's December 31, 2025 sunset from the rate schedule, so the seven brackets, topping out at 37.00%, now apply to every year with no end date. §70102 made the enlarged standard deduction permanent: $16,100 single and $32,200 joint for 2026. §70104 raised the child tax credit to $2,200 per child from tax year 2025, indexed, with up to $1,700 refundable for 2026. And §70106 set the estate and gift exclusion at $15,000,000 for 2026, indexed thereafter. The full 2026 bracket tables are in the brackets article; the estate figure has its own piece.

Whether your state sees any of this depends on one line

A state that computes its tax from federal AGI never meets Schedule 1-A, because the schedule does its work below that line. New York is one: Tax Law §612(a) starts the IT-201 at federal AGI, so a Manhattan bartender's New York tax is the same with the federal tip deduction as without it. None of the four reaches that return.

Colorado starts one line lower. DR 0104 line 1 is federal taxable income, Form 1040 line 15, a figure Schedule 1-A has already reduced. The $65,000 bartender with $18,000 of reported tips from our tips article pays Colorado's flat 4.40% on that smaller base for tax year 2025, and 4.40% of $18,000 is $792 of state tax that never comes due, on top of the federal saving. Colorado's legislature has already made the state layer a choice, in one direction only: HB25-1296 §6 adds federally deducted overtime pay back to Colorado taxable income for tax years beginning on or after January 1, 2026, while the tip deduction keeps flowing through. From the 2026 return on, the same Colorado server deducts tips and adds overtime back. In the nine states with no tax on wage income, there is nothing for the deductions to change.

Four filing seasons

Sections 224(h) and 225(g) allow no tips or overtime deduction for taxable years beginning after December 31, 2028; §163(h)(4) runs the car-loan deduction over the same four years; and the senior deduction's 2025-through-2028 window matches. The last return that can carry any of them is the 2028 return, filed in early 2029, and the SALT cap follows in 2030, dropping to its permanent $10,000. To see what the years in between cost on your own number, the calculator runs the federal and state layers together.

This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional for guidance specific to your situation.