The typical refund for taxpayers in the U.S. is anticipated to rise by $300, reaching an average of $1,000 this tax season. However, several prominent tax cuts may not offer much relief to most individuals.
Among these changes are a “Tax Exemption on Tips,” an “Exemption from Taxes on Overtime,” and a new $6,000 deduction specifically for individuals aged 65 and older.
Following the passage of President Donald Trump’s One Big Beautiful Bill Act by a Republican-controlled Congress last July, tax experts began examining the implications closely. For instance, analysts estimate that the “tip tax exemption” could potentially benefit about 1 in 40 taxpayers.
On the flip side, modifications brought about by the law, such as an expanded standard deduction and an increased child tax credit, would be more beneficial for a larger segment of taxpayers, with adjustments occurring faster than inflation.
The IRS will begin accepting tax returns for the 2025 tax year on January 26, with the filing deadline set for April 15, unless an extension is granted.
“Tipping tax exemption” applies to some taxpayers
As per reports, most taxpayers are aware that the new tipping exemption may not significantly impact them, given that only around 2.5% of workers receive tips, according to Yale University’s Budget Institute, as of 2023.
Similarly, estimates from the Tax Policy Center indicate that only about 3% of households are able to avoid taxes on tips. For these households, the average benefit comes out to about $40.
This limited group includes various service workers like food servers, bartenders, hairdressers, and even ride-share drivers.
However, there are stipulations. Tipped workers can claim up to $25,000 in tips annually, with the benefits tapering off for single filers earning more than $150,000, and starting at $300,000 for joint filers.
Additionally, to qualify for this exemption, tips must be given voluntarily. For instance, if a food server receives an automated 18% tip added to a bill, that amount is still taxable.
Less than 1 in 10 workers will benefit from “overtime pay tax exemption”
Reports from The Tax Policy Center reveal that the “overtime tax exemption” is projected to help about 9% of U.S. workers, with expected benefits averaging only around $130, which might be lower than what many assumed.
This exemption does not extend to salaried or hourly workers who aren’t able to work overtime.
Specifically, certain city and county employees in Oregon—like firefighters and police officers—who often earn significant overtime pay stand to gain from this break.
Still, many who work extensive overtime might struggle to benefit from this deduction. The IRS permits you to deduct overtime pay up to $12,500 for single filers and up to $25,000 for joint filers.
Moreover, taxpayers still have to pay tax on their overtime pay at their usual hourly rate, and only the additional half of what makes up overtime is tax-exempt. So, if a worker makes $9,000 in overtime, only $3,000 is tax-free.
This tax relief is phased out at modified adjusted gross incomes of $150,000 for single filers and $300,000 for joint filers.
About half of older taxpayers will see significant savings.
The Tax Policy Center estimates that approximately half of the taxpayers aged 65 and older will benefit from the new $6,000 deduction for older individuals. This change is expected to give the average elderly taxpayer roughly an extra $450.
This deduction phases out for single filers earning modified adjusted gross incomes of $75,000 and $150,000 for joint filers, which is notably lower than the thresholds for the tip and overtime tax credits.
Most car buyers are not eligible for the ‘tax exemption on car loan interest’
This deduction will mostly exclude those with existing car loans, as statistics show that 3 out of 4 cars sold are used.
This new benefit applies only to taxpayers who purchase a new car in 2025 and in future tax years until 2028.
Those who lease cars won’t qualify either; approximately 23% of new cars nationwide are leased.
For those eligible, the deduction allows them to reduce up to $10,000 in interest each year.
But that might be more than necessary since most new car buyers, whose typical vehicle price surpassed $50,000 last year, won’t rack up $10,000 in interest over a five-year period.
Notably, this car loan interest exemption begins to phase out when modified adjusted gross income reaches $100,000 for single filers and $200,000 for joint filers.
Small increases for 90% of taxpayers
Historically, nearly 90% of taxpayers opt for the standard deduction, which is a fixed amount exempt from taxation.
This year, there’s a 10% increase, which, while rapid compared to inflation—around 3%—will impact the majority of taxpayers.
The standard deduction for 2025 will rise by $750 for single or married individuals filing separately, bringing it to $15,750. For married couples filing jointly, the deduction increases by $1,500, totaling $31,500.
Bringing tens of millions of benefits to families with children
The child tax credit will also affect many U.S. taxpayers, with tens of millions expected to benefit. For the 2025 tax year, this deduction will increase by $200 compared to last year, reaching up to $2,200 per child—marking a 10% rise and significantly outpacing inflation.
It’s hard to determine the exact number of taxpayers who will take advantage of the child tax credit this season.
However, it’s worth noting that this credit is available only to single filers with annual incomes up to $200,000, and up to $400,000 for joint filers. Beyond these limits, parents may receive a partial credit.
To claim most of these deductions you will need to fill out this new form
The IRS has introduced a new Schedule 1-A form. To claim deductions such as “No tax on tips,” “No tax on overtime,” a $6,000 credit for senior taxpayers, and “No tax on auto loan interest,” taxpayers need to fill out this form.
