The IRS has unveiled drafts of several tax forms for 2026 under the One Big Beautiful Bill Act (OBBBA), which includes a new Schedule 1-A focused on Additional Deductions. This update is aimed primarily at addressing the needs of workers who earn tips and receive overtime pay.
At the top of Schedule 1-A, one significant task is calculating the revised adjusted gross income (MAGI). The figure reported in line 3 helps establish eligibility for various new deductions included in this schedule.
These deductions are often referred to by their familiar names: no taxes on tips, no taxes on overtime, and no taxes on car loan interest. An exception is the provision labeled “enhanced deductions for seniors,” which suggests there are no taxes on social security. This choice of terminology raises questions since none of these provisions technically qualify as tax exemptions.
So, let’s delve a bit deeper.
Tips Deduction Report and Calculation
Under the OBBBA, taxpayers who receive qualifying tips, such as voluntary cash or recharged tips in their usual jobs, can claim a new deduction. This deduction is valid from 2025 to 2028, and taxpayers have the option to itemize it. The maximum annual deduction is set at $25,000, but if you’re self-employed, it can’t exceed your net profit from the business where you received those tips.
Even though this is a federal income tax exemption, tips are still subject to state and local taxes. The IRS highlights two main criteria: (1) You must receive a qualifying tip, and (2) if you’re married, ensure you file jointly to claim the deduction.
You’ll need to enter the amount of qualified tips from your Form W-2 or other relevant forms. After totaling these tips, your tentative deduction will either be that amount or $25,000, whichever is lower. There’s a critical next step: phase-outs. As your income rises, the tax benefits gradually decrease—in this case, starting for those with adjusted gross incomes above $150,000 ($300,000 for joint filers).
Looking at Schedule 1-A, let’s assume qualifying tips tally $25,000 and that your MAGI is $185,000.
- Determine excess MAGI above the phase-out threshold ($185,000 – $150,000 = $35,000).
- Calculate the reduction in your deduction. For this case, the deduction phases out by $100 for every $1,000 over the threshold. So, divide $35,000 by $1,000 (which is 35) and then multiply by $100, giving a reduction of $3,500.
- Finally, compute your allowable deduction by taking the maximum deduction ($25,000) and subtracting the reduction ($3,500), resulting in $21,500.
For a single filer, should your MAGI hit $400,000, that deduction will be eliminated.
Report and Calculate Overtime Deductions
A new temporary deduction for qualifying overtime pay will also be available until 2028. This deduction, like the tips one, can be claimed regardless of whether you itemize. The deductible amount is half of the “time and a half” pay for overtime. To qualify, these overtime earnings must be reported on recognized forms like W-2 or 1099.
The maximum deduction stands at $12,500, or $25,000 if filed jointly. The IRS has two criteria here as well: (1) it applies only if overtime is actually received, and (2) filing jointly if married is a must.
Record the eligible overtime amount from your forms, which will either equal your total overtime or $12,500 (or $25,000 for joint filers). Again, phase-outs apply for incomes over $150,000 ($300,000 for joint filers).
For the sake of illustration, let’s say qualifying overtime amounts to $12,500, and your MAGI is $250,000.
- Calculate excess MAGI at the phase-out threshold ($250,000 – $150,000 = $100,000).
- Determine how much of the deduction is lost, using the established rate of reduction ($100 for every exceeding $1,000). With $100,000 over the threshold, it equates to a loss of $10,000.
- Now calculate the allowable deduction: $12,500 – $10,000 = $2,500.
In this scenario, the allowed overtime deduction would come to $2,500. For a single filer, if MAGI reaches $275,000, the deduction would be eliminated.
Automobile Interest Deduction Report and Calculation
Another new deduction applies to interest paid on loans for eligible vehicles, applicable from 2025 to 2028. This can be claimed whether or not you itemize. To qualify, interest must be paid on loans taken out after December 31, 2024, and only for vehicles that you use personally.
Eligible vehicles include cars, minivans, vans, SUVs, light trucks, and motorcycles, all under 14,000 pounds. Interest from refining a qualifying vehicle loan may also be deductible.
You will need to report the vehicle identification number (VIN) and total your interest deductions, claiming either that total or $10,000 (the maximum). Phase-outs also apply to this deduction, starting at adjusted gross incomes above $100,000 ($200,000 for joint filers).
For instance, if your car loan interest is $8,000 and your MAGI is $350,000:
- Calculate the excess MAGI ($350,000 – $200,000 = $150,000).
- Determine the deduction loss, which will reduce by $200 for every $1,000 over the threshold. That’s a loss of $30,000 in this case.
- The maximum deduction will thus sit at $10,000 – $30,000, which is essentially zero.
Once you backtrack, a joint filer with a MAGI of $250,000 would find the deduction nullified much sooner compared to the tips and overtime deductions.
Strengthening Deductions for Seniors Reporting and Calculations
Seniors, under the OBBBA, can claim a temporary deduction worth $6,000, set to expire in 2028. This deduction is available to both itemizers and those opting for the standard deduction. It replaces the prior notion that social security isn’t taxable, with no separate provisions supporting that claim.
To qualify, either you or your spouse must have a valid Social Security number when claiming this deduction. And yes, married couples must file jointly.
Income reporting is not required aside from considering MAGI. For example, if as a single filer your MAGI is noted at $100,000:
- Calculate excess MAGI against set thresholds ($100,000 – $75,000 = $25,000).
- Determine how much of the deduction might be lost. This phase-out calculation operates on a percentage basis, in this case, 6%, leading to a reduction of $1,500.
- Finally, compute the allowable deduction: $6,000 – $1,500 = $4,500.
In that scenario, the allowable deduction amounts to $4,500. For single filers, once MAGI gets to $125,000, the deduction is effectively gone.
The Final Step
After figuring all your deductions, you’ll sum them up and record that figure on the new line 13B of form 1040. This change structures your taxes a bit differently than before, with the new layout caught on page 2. The deductions will reduce your income before tax calculations.
And remember—tax credits are typically more beneficial than deductions for your taxable income.
More from the IRS
The IRS has also shared some familiar warnings along with fresh tweaks about the drafting of these new forms.
This is an early draft of IRS tax forms, and it shouldn’t be submitted as is. Significant changes to the final forms should be tracked via the provided cover sheets, as unexpected issues may arise. Additionally, once the law is finalized, it could prompt a new draft. Form revisions usually undergo further changes prior to final approval.
If you have feedback, the IRS welcomes comments online.
You can view the draft form here.
