The One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, introduces major changes to the federal tax system that affect individuals,
families, workers, and retirees. These provisions apply primarily to tax years 2025 through 2028, with some changes becoming permanent.
Below is a plain-English overview of the most impactful updates—and how they may affect you as a taxpayer.
No Tax on Qualified Tips (Income Tax Deduction)
For workers in hospitality and other service industries, tips are often a significant portion of income.
What Changed?
For tax years 2025 through 2028, taxpayers may deduct up to $25,000 per year of qualified tip income from federal taxable income.
This is a deduction, not an exclusion:
- Tips are still included in gross income
- Tips remain subject to Social Security and Medicare taxes
- There is no change to paycheck withholding
What Qualifies as a Tip?
- Cash or card-based tips
- Tips received in qualifying occupations
- Tips reported on:
- Form W-2
- Form 1099
- Form 4137 (for unreported tips)
Not eligible:
- Mandatory service charges
- Regular wages
- Non-cash rewards or bonuses
Example
A restaurant adds a mandatory 15% service charge for large parties. Even though it appears like a tip, it is a required fee and does not qualify for the tip deduction.
Deduction Limits & Phaseout
- Maximum deduction: $25,000 per year
- Phaseout begins when MAGI exceeds:
- $150,000 (single)
- $300,000 (married filing jointly)
- Reduced by $100 for every $1,000 over the limit
Qualifying Occupations
The IRS has identified tip-based occupations across categories including:
- Food & beverage service
- Entertainment and events
- Hospitality and guest services
- Personal services and wellness
- Transportation and delivery
- Home and recreation services
Other Requirements
- Valid Social Security number
- Married taxpayers must file jointly
Example
Maria, a waitress, earns $30,000 in tips and $40,000 in wages in 2025. She reports all tips properly and has MAGI below $150,000. She may deduct $25,000 of tips, reducing her adjusted gross income from $70,000 to $45,000.
No Tax on Qualified Overtime (Income Tax Deduction)
For tax years 2025 through 2028, workers may deduct qualified overtime pay from federal taxable income.
What Counts as Qualified Overtime?
- The portion of overtime pay that exceeds the employee’s regular hourly rate
- Commonly referred to as the “half” portion of time-and-a-half pay
- Must be required under the Fair Labor Standards Act (FLSA)
Deduction Limits
- Up to $12,500 per year (single)
- Up to $25,000 per year (married filing jointly)
Like the tip deduction:
- This is not a payroll tax exemption
- Social Security and Medicare taxes still apply
- Deduction phases out beginning at:
- $150,000 MAGI (single)
- $300,000 MAGI (joint)
Employers must separately report qualified overtime. Contractors report amounts on Form 1099. Special transition rules apply for 2025.
Example
Jane earns $60,000 in wages and $10,000 in qualified overtime. She may deduct the full $10,000, reducing her federal taxable income to $60,000.
New Senior Deduction (Age 65+)
For tax years 2025 through 2028, a new deduction is available for taxpayers age 65 or older.
Deduction Amount
- $6,000 per qualifying individual
- Married couples filing jointly may claim up to $12,000
Income Limitation
- Deduction reduced by 6% of MAGI exceeding:
- $75,000 (single)
- $150,000 (joint)
Requirements
- Valid Social Security number
- Married couples must file jointly
Important Note
Social Security benefits are still taxable under existing rules. However, this new deduction may reduce overall taxable income and lower the tax impact.
Example
John (68) and Mary (66) file jointly with MAGI of $140,000. They qualify for the full $12,000 senior deduction.
Increased Child Tax Credit
Families will see enhancements to the Child Tax Credit (CTC) starting in 2025.
What Changed?
- Credit increased from $2,000 to $2,200 per qualifying child
- Expansion is now permanent
- Valid Social Security numbers required for:
- At least one parent on a joint return
- Each qualifying child
Deduction for Car Loan Interest
For tax years 2025 through 2028, taxpayers may deduct interest paid on new personal vehicle loans, even if they do not itemize deductions.
Key Rules
- Maximum deduction: $10,000 per year
- Loan must:
- Be incurred after December 31, 2024
- Be secured by a first lien
- Be for a brand-new vehicle
- Involve a vehicle assembled in the U.S.
- Deduction phases out beginning at:
- $100,000 MAGI (single)
- $200,000 MAGI (joint)
Vehicle identification number (VIN) must be reported on the return.
Example
Katie buys a new SUV and pays $2,300 in interest in 2025. Her MAGI is $95,000. She may deduct the full $2,300.
Trump Accounts (New Savings Accounts for Children)
A Trump Account is a new tax-advantaged savings account for children under 18, designed to encourage early investing.
Eligibility
- Child must be under 18 with a Social Security number
- Only one account per child
Contributions
- Up to $5,000 per year
- Contributions begin July 4, 2026
- No deduction for parent contributions
- Employers may contribute up to $2,500 per year, tax-free
Investments
- Limited to low-fee, broad-based U.S. stock index funds
- No leverage or high-fee investments allowed
Distributions
- No withdrawals before age 18 (limited exceptions)
- Taxed similarly to traditional IRAs after age 18
Government Pilot Program
- Children born between January 1, 2025, and January 1, 2029 may receive a $1,000 government contribution
- Funded through a refundable tax credit paid directly into the account
Permanent Elimination of Miscellaneous Itemized Deductions
Beginning in 2026, miscellaneous itemized deductions are permanently eliminated, including:
- Unreimbursed employee expenses
- Tax preparation fees
- Investment advisory fees
Expanded Educator Expense Deduction
The law expands eligibility to include:
- Teachers
- Counselors
- Principals
- Aides
- Coaches and interscholastic sports administrators
Final Thoughts
The One Big Beautiful Bill Act creates meaningful tax relief for workers, families, seniors, and future generations—while also permanently removing certain deductions.
Because these changes interact with income levels, filing status, and reporting requirements, individualized tax planning is essential.
Contact us if you have questions about how these provisions apply to your situation. We are here to help you navigate the new tax landscape with confidence.