The One Big Beautiful Bill Act (OBBBA), Pub. L. 119-21, signed July 4, 2025, introduced six major tax provisions effective for tax years 2025 through 2028. Three are above-the-line income deductions (tip income, overtime premium, auto loan interest). Two are changes to existing benefits (SALT cap raised to $40,000; Child Tax Credit raised to $2,200). One is a new federal savings vehicle (Trump Account, $1,000 seed). All apply to your 2025 federal return filed in 2026.
- The OBBBA created three new above-the-line deductions: tips (IRC §224), overtime (IRC §225), and auto loan interest (IRC §163(h)(4)). All use Schedule 1-A and reduce AGI whether or not you itemize.
- All three deductions phase out above income thresholds and expire after December 31, 2028. FICA and SECA taxes are unaffected.
- The SALT deduction cap increased from $10,000 to $40,000 for TY 2025 through 2029. It requires itemizing on Schedule A and phases out above $500,000 MAGI.
- The Child Tax Credit rose from $2,000 to $2,200 per qualifying child (TY 2025–2028). The refundable ACTC portion can directly increase your refund. PATH Act hold applies to ACTC filers.
- Trump Accounts provide a $1,000 federal seed for children born after December 31, 2024. Contributions are after-tax and do not affect your current-year return.
OBBBA Quick Reference: All Seven Provisions
| Provision | Cap | Phase-Out Starts | Filing Form | Expires |
|---|---|---|---|---|
| No Tax on Tips (§224) | $25,000 (single/HOH); $25,000 per spouse (MFJ) | $150K single / $300K MFJ | Schedule 1-A | Dec 31, 2028 |
| No Tax on Overtime (§225) | $12,500 (single/HOH); $25,000 (MFJ) | $150K single / $300K MFJ | Schedule 1-A | Dec 31, 2028 |
| Auto Loan Interest (§163(h)(4)) | $10,000 per return | $100K single / $200K MFJ | Schedule 1-A | Dec 31, 2028 |
| SALT Increase | $40,000 (floor $10,000) | $500K MAGI (all statuses) | Schedule A (itemize) | Dec 31, 2029 |
| Child Tax Credit | $2,200 per qualifying child | $200K single / $400K MFJ | Schedule 8812 | Dec 31, 2028 |
| Trump Account (MAGA) | $5,000/year contributions; $1,000 federal seed | N/A (seed eligibility TBD) | Not current-year | Dec 31, 2028 |
| Senior Enhanced Deduction (§70103) | $6,000 per person age 65+ (MFS ineligible) | $75K single / $150K MFJ | Schedule 1-A (stacks on §63(f)) | Dec 31, 2028 |
What Is the OBBBA?
The One Big Beautiful Bill Act was signed into law on July 4, 2025, as Public Law 119-21. It is the largest single piece of federal tax legislation since the Tax Cuts and Jobs Act of 2017.
The legislation targeted five specific groups: tipped workers, overtime earners, new car buyers, high-state-tax itemizers, and families with young children. It did so through a combination of new above-the-line deductions, an expanded existing deduction, a new credit amount, and a new federal savings vehicle.
Most provisions are temporary. They apply to tax years 2025, 2026, 2027, and 2028 only. The SALT increase extends through 2029. Without further legislation, all provisions revert to pre-OBBBA rules after their sunset dates.
The three deduction provisions (IRC §224, §225, §163(h)(4)) are reported on a new IRS form: Schedule 1-A (Form 1040), titled "Additional Deductions." This is separate from Schedule A (itemized deductions) and applies regardless of whether you take the standard or itemized deduction.
IRC §224 — No Tax on Tips (2025)
Section 224 allows eligible workers to deduct qualified tip income from federal income tax. For tax year 2025, the maximum deduction is $25,000 per filer. Married filing jointly returns allow $25,000 per spouse, for a combined maximum of $50,000.
Who qualifies
Workers employed in one of the approximately 68 designated tip-receiving occupations under IRS guidance. The key requirement is that tips must be paid by a third party (customer) — not by the employer. Employer-paid service charges that are redistributed to employees do not qualify as tips under §224. The deduction applies to both W-2 employees and self-employed workers in qualifying tip industries.
Phase-out and income limits
The deduction phases out starting at $150,000 MAGI for single filers and heads of household, and $300,000 MAGI for married filing jointly. The phase-out is $100 per $1,000 of MAGI over the threshold. Married filing separately filers are fully disqualified. The deduction is fully eliminated at approximately $400,000 MAGI single and $550,000 MAGI married filing jointly.
FICA and SECA still apply
The tip deduction reduces federal income tax only. Social Security tax (6.2%) and Medicare tax (1.45%) continue to apply to tip income. Self-employed workers continue to pay SECA on qualifying tip income. The deduction does not change W-2 Box 1 withholding obligations for employers.
IRC §225 — No Tax on Overtime (2025)
Section 225 allows eligible employees to deduct the overtime premium portion of overtime wages. For tax year 2025, the maximum deduction is $12,500 for single filers and heads of household and $25,000 for married filing jointly.
Premium portion only — not total overtime pay
The deduction applies to the overtime premium — the extra "0.5×" above the regular rate — not the full overtime paycheck. For a worker paid 1.5× for overtime hours, only the 0.5× premium portion is deductible under §225. The base regular-rate pay is not deductible. This is the most common misunderstanding about this provision.
W-2 employees only
Section 225 applies exclusively to employees subject to the Fair Labor Standards Act (FLSA) Section 7 overtime requirements. Self-employed workers, contractors, and business owners do not qualify. There is no self-employment equivalent of the overtime deduction.
Phase-out and disqualified statuses
The deduction phases out starting at $150,000 MAGI single and $300,000 MAGI married filing jointly. The phase-out rate is $100 per $1,000 of MAGI over the threshold. Married filing separately filers are fully disqualified.
W-2 reporting change starting TY 2026
For tax year 2025, employers may voluntarily report qualifying overtime in Box 14. Starting with TY 2026, qualifying overtime is reported in Box 12 with Code TT under updated IRS W-2 instructions.
IRC §163(h)(4) — Auto Loan Interest Deduction (2025)
IRC §163(h)(4) allows taxpayers to deduct interest paid on a qualifying auto loan. For tax year 2025, the maximum deduction is $10,000 per return regardless of filing status. Married filing separately filers are disqualified.
Vehicle requirements
The vehicle must be new (not used), a passenger vehicle, and assembled in the United States. The purchase must occur after December 31, 2024. Leased vehicles do not qualify. Refinancing a pre-2025 vehicle does not create new eligibility. The loan must be the original purchase financing for the qualifying vehicle.
Phase-out and income limits
The deduction phases out starting at $100,000 MAGI single and $200,000 MAGI married filing jointly. The phase-out rate is $200 per $1,000 of MAGI over the threshold. The deduction is eliminated at approximately $150,000 MAGI single/HOH and $250,000 MAGI married filing jointly.
SALT Deduction Increase (2025)
The OBBBA increased the state and local tax (SALT) deduction cap from $10,000 to $40,000 for tax years 2025 through 2029. The married filing separately cap is $20,000. Unlike the three §224/§225/§163(h)(4) deductions, the SALT increase requires itemizing on Schedule A.
Who benefits
Taxpayers in high-tax states (California, New York, New Jersey, Massachusetts, Connecticut, Illinois, and others) who already paid more than $10,000 in state income taxes and property taxes combined. A filer paying $35,000 in state taxes benefits from a $25,000 larger deduction compared to the prior TCJA cap. The benefit is only realized if total itemized deductions exceed the standard deduction.
Phase-out and floor
The $40,000 cap phases out for taxpayers with MAGI above $500,000. The phase-out rate is $300 per $1,000 of MAGI over the threshold (30% of excess MAGI under §70120). The cap never falls below $10,000 — it cannot go below the TCJA floor even in the phase-out range. The deduction is not available for AMT purposes.
PTET workaround still available
The pass-through entity tax (PTET) workaround under IRS Notice 2020-75 remains available alongside the individual cap increase. Business owners with pass-through income can continue to use entity-level state tax payments to reduce federal taxable income.
Trump Account (Money Account for Growth and Advancement, 2025)
The Trump Account, formally named the Money Account for Growth and Advancement (MAGA Account), is a new federal savings vehicle for children. The federal government provides a $1,000 seed deposit for children born after December 31, 2024. Families can contribute up to $5,000 per year from all sources combined.
Key account rules
Contributions are after-tax and are not deductible on the federal return. Investments are limited to U.S. equity index funds. Distributions begin at age 18. Distribution tax treatment and qualified uses (education, first home, business) are pending IRS guidance as of this writing.
Not a current-year tax deduction
Trump Account contributions do not reduce your adjusted gross income, reduce your tax liability, or affect your refund for the year you contribute. The benefit is long-term: a $1,000 seed compounding over 18 years at an assumed 7% average annual return produces approximately $3,380 at age 18 before any additional contributions.
Relationship to Child Tax Credit
The CTC and a Trump Account are independent OBBBA provisions. You can claim the CTC on your current-year return and also open a Trump Account for the same child. The two do not interact. Claiming the CTC does not affect the Trump Account, and contributing to a Trump Account does not reduce or alter the CTC.
Child Tax Credit Increase (2025)
The OBBBA increased the Child Tax Credit from $2,000 to $2,200 per qualifying child for tax years 2025 through 2028. The credit applies to children under age 17 at year end who meet the standard qualifying child rules under IRC §24 and §152.
Non-refundable and refundable components
The non-refundable portion of the CTC reduces your federal income tax liability. If the CTC exceeds your tax liability, the excess may become the Additional Child Tax Credit (ACTC), which is refundable. The ACTC formula is 15% of earned income above $2,500, capped at the unused non-refundable CTC. Married filing separately filers cannot claim the ACTC.
Phase-out thresholds
The CTC phases out starting at $200,000 MAGI for single filers and heads of household and $400,000 MAGI for married filing jointly. The phase-out rate is $50 per $1,000 of MAGI over the threshold (rounded up to the nearest $1,000).
PATH Act hold on ACTC refunds
Returns claiming the ACTC are subject to the PATH Act: the IRS cannot release ACTC refunds before February 15, regardless of when the return was filed. If you expect an ACTC refund, plan for a mid-February or later deposit. Use the Refund Date Estimator to project your specific deposit date after the PATH Act hold lifts.
§70103 — Senior Enhanced Standard Deduction (2025)
The OBBBA added a $6,000 enhanced standard deduction for taxpayers age 65 or older, codified at IRC §70103. This deduction stacks on top of both the regular base standard deduction and the existing §63(f) age and blindness add-ons — creating a three-layer deduction system for eligible seniors. It applies to tax years 2025 through 2028.
How the three layers add up
A single filer age 65 in TY 2025 has: a $15,000 base standard deduction, plus a $2,000 §63(f) age add-on, plus the $6,000 §70103 OBBBA deduction — a total of $23,000 before any phase-out. An MFJ couple where both spouses are age 65 can reach $46,000 total before phase-out.
Phase-out and ineligible statuses
The $6,000 deduction phases out at $60 per $1,000 of MAGI above $75,000 (single/HOH) or $150,000 (MFJ). It is fully eliminated at $175,000 MAGI for single filers and $250,000 MAGI for MFJ. Married filing separately filers are ineligible for the §70103 deduction entirely.
Itemizers and this deduction
The §70103 deduction applies even if you itemize. It is an above-the-line-equivalent enhancement to the standard deduction amount, not a Schedule A item. Unlike the §63(f) add-ons, the §70103 benefit is available regardless of whether you itemize or take the standard deduction. Note: §63(f) add-ons themselves only apply to standard deduction takers.
Who This Affects: OBBBA Provision by Taxpayer Type
The OBBBA provisions are narrowly targeted. Not all filers benefit from every provision. This table shows which taxpayer types can access each benefit.
| Taxpayer Type | Applicable Provisions |
|---|---|
| W-2 employee in tipped occupation | §224 tips deduction (Schedule 1-A) |
| W-2 employee with overtime pay | §225 overtime deduction — premium portion only (Schedule 1-A) |
| W-2 employee with both tips and overtime | §224 and §225 can be stacked on same Schedule 1-A |
| Anyone who bought a new U.S.-assembled car after 12/31/2024 | §163(h)(4) auto loan interest deduction (Schedule 1-A) |
| Itemizer in a high state-tax state | SALT deduction up to $40,000 (Schedule A) |
| Parent with child under age 17 | Child Tax Credit up to $2,200 per child (Schedule 8812) |
| Parent with child born after 12/31/2024 | Child Tax Credit + Trump Account $1,000 seed (independent) |
| Self-employed worker in tip industry | §224 applies to self-employed; §225 does NOT apply to self-employed |
| Taxpayer age 65 or older | §70103 senior deduction — $6,000 per eligible person (phases out above $75K single / $150K MFJ); stacks on §63(f) |
| Married filing separately | Disqualified from §224, §225, §163(h)(4), ACTC, §70103 senior deduction; SALT cap is $20,000 |
IRS Guidance Status: Confirmed vs. Pending
As of April 2026, the IRS has issued implementation guidance on most OBBBA provisions. Several items remain pending final guidance. Items below reflect verified IRS publications and statutory text.
| Provision | Confirmed Confirmed | Pending IRS Guidance Pending |
|---|---|---|
| §224 Tips | Cap ($25K/filer), phase-out rates, Schedule 1-A, FICA unaffected, MFS disqualified, self-employed eligible | Final complete occupational list (IRS issued preliminary list; edge-case occupations not fully resolved) |
| §225 Overtime | Premium-only rule, FLSA §7 employees only, cap ($12.5K single / $25K MFJ), phase-out rates, Schedule 1-A, MFS disqualified, W-2 Box 12 Code TT (TY 2026+) | None material — core guidance complete |
| §163(h)(4) Auto Loan | $10K cap, vehicle requirements (new, U.S.-assembled, GVWR < 14,000 lbs), phase-out rates ($200/$1K), MFS disqualified, Schedule 1-A, Notice 2025-57 lender statement transitional relief (TY 2025) | Form 1098-VLI mandatory for TY 2026+ (transitional lender statement relief expires after TY 2025) |
| SALT Increase | $40,000 cap TY 2025, $500K MAGI phase-out threshold, 30% phase-out rate ($300/$1K), $10K floor, must itemize Schedule A, PTET workaround preserved (Notice 2020-75), expires TY 2029 | None material — statutory text and IRS table values confirmed |
| Child Tax Credit | $2,200 per qualifying child, phase-out thresholds, ACTC refundable formula (15% of earned income above $2,500), PATH Act hold, Schedule 8812 | None material |
| Trump Account | $1,000 federal seed (children born after 12/31/2024), $5,000/yr combined contribution limit, after-tax contributions, U.S. equity index funds only, age 18 minimum | Distribution tax treatment, qualified use categories (education, first home, business start-up), seed income eligibility conditions |
| §70103 Senior Deduction | $6,000 per eligible person age 65+, phase-out ($60/$1K above $75K single / $150K MFJ), eliminated at $175K single / $250K MFJ, MFS ineligible, available to itemizers and standard deduction takers, stacks on §63(f) | None material — IRS confirmed availability regardless of itemizing choice |
How to Stack Multiple OBBBA Benefits
The three above-the-line deductions (§224 tips, §225 overtime, §163(h)(4) auto loan interest) can all appear on the same Schedule 1-A. Their caps apply independently. A W-2 nurse with tip income, overtime hours, and a new car purchase in 2025 could claim all three deductions on the same return.
The SALT increase and the above-the-line deductions operate on different forms. You can claim all three Schedule 1-A deductions and also itemize to claim the full $40,000 SALT deduction, provided your total itemized deductions exceed the standard deduction. The above-the-line deductions reduce AGI first, which may affect the amount of itemized deductions that exceed the standard deduction threshold.
The Child Tax Credit operates independently from the deductions. It is a credit against tax liability calculated after the deductions reduce AGI. Lower AGI from the above-the-line deductions does not directly increase the CTC, but it can affect whether you fall within the phase-out range.
Ordering of benefits on a single return
- Add all income (W-2 wages, tips, overtime, self-employment, etc.)
- Subtract Schedule 1-A deductions (§224 tips + §225 overtime + §163(h)(4) auto loan interest) to arrive at AGI
- Subtract the standard deduction or Schedule A itemized deductions (including the higher SALT cap up to $40,000)
- Arrive at taxable income and calculate federal income tax
- Apply credits: Child Tax Credit from Schedule 8812 reduces tax liability
- If CTC exceeds tax liability, the ACTC portion flows as a refundable credit
Practitioner Insight
At LMN Tax Inc, most clients with tip income or overtime income for 2025 have not yet adjusted their W-4 withholding to reflect the new deductions. This means they may be significantly overwithholding throughout the year. If you qualify for the tip or overtime deduction, recalculating your withholding using an updated W-4 is one of the highest-ROI actions available to you before year end — it puts the tax savings in your paycheck now rather than as a refund in April. For stacked filers claiming multiple provisions, the combined AGI reduction can be substantial and warrants a mid-year withholding check.
Real-World Scenario: Stacking OBBBA Benefits
Situation: Maya and David are married filing jointly. Maya is a registered nurse earning $95,000 base salary, $22,000 in employer-recognized tip income, and $9,000 in overtime premium pay for TY 2025. David is a software engineer earning $85,000 with no tips or overtime. They purchased a new American-assembled vehicle in March 2025 and paid $7,200 in auto loan interest for the year. They have two children: one age 8 and one born February 14, 2025 (qualifying newborn). They live in New Jersey and paid $31,000 in state income and property taxes.
OBBBA benefits available:
- IRC §224 tip deduction: $22,000 (full cap, under $300K MFJ phase-out threshold)
- IRC §225 overtime deduction: $9,000 (full cap, under $300K MFJ threshold)
- IRC §163(h)(4) auto loan interest: $7,200 (under $10,000 cap, under $200K MFJ threshold)
- SALT deduction: $31,000 in state/local taxes — previously capped at $10,000, now fully deductible up to $40,000 (net gain of $21,000 if itemizing)
- Child Tax Credit: $2,200 × 2 qualifying children = $4,400 gross CTC
- Trump Account: $1,000 federal seed for the February 2025 newborn (after-tax, does not appear on return)
Combined AGI reduction from Schedule 1-A: $38,200 ($22K + $9K + $7.2K). The SALT increase provides an additional $21,000 in itemized deductions above the prior $10,000 cap. The $4,400 CTC applies against tax liability after the deduction stack reduces taxable income.
When OBBBA Benefits May Not Apply
- Married filing separately: Disqualified from all three above-the-line deductions (§224, §225, §163(h)(4)), from the ACTC, and the SALT cap is $20,000. MFS is the most common disqualification across all OBBBA provisions.
- Self-employed overtime: IRC §225 applies only to FLSA Section 7 employees. Sole proprietors, LLC members, and S-Corp shareholders with W-2 owner pay are not FLSA overtime workers and do not qualify for §225.
- Used or foreign-assembled vehicles: IRC §163(h)(4) requires a new vehicle assembled in the United States. A used car purchase or a new foreign-manufactured vehicle purchased in 2025 does not qualify.
- Standard deduction filers and SALT: The SALT increase provides no benefit to taxpayers whose itemized deductions do not exceed the standard deduction ($30,000 for MFJ in 2025). The higher SALT cap is irrelevant if you do not itemize.
- Child age 17 at year end: A child who turns 17 during the tax year does not qualify for the CTC. The child must be under 17 at December 31 of the tax year.
- No valid SSN: The CTC requires a valid Social Security number issued before the due date of the return (including extensions). ITIN-only children do not qualify for the CTC.
- High-income phase-outs: All OBBBA provisions have income phase-outs. At high enough income levels, each provision reduces to zero. Run the relevant calculator to determine whether you fall within a phase-out range.
Next Step
Start with the deductions most likely to apply to your situation. If you have W-2 tip income, run the No Tax on Tips Calculator first. If you have W-2 overtime pay, run the No Tax on Overtime Calculator to see your premium-portion deduction. If you bought a new car in 2025, use the Auto Loan Interest Calculator.
For itemizers in high-tax states, the SALT Deduction Calculator shows your net benefit from the cap increase. Then use the Standard Deduction vs. Itemized Calculator to confirm your total Schedule A deductions exceed the standard deduction. Parents with qualifying children should run the Child Tax Credit Calculator to see both the non-refundable and ACTC components.
After calculating your deductions, use the Refund Date Estimator to project how a lower federal tax liability from the OBBBA provisions may affect your expected refund date.
Frequently Asked Questions — OBBBA Tax Changes 2025
- IRS Guidance on Tip and Overtime Income Deductions — IRS.gov
- IRS Schedule 1-A (Form 1040) — Additional Deductions
- IRS Instructions for Forms W-2 and W-3 (Box 12 Code TT)
- IRS Child Tax Credit — IRC §24
- One Big Beautiful Bill Act, Pub. L. 119-21 (2025)