How the One Big Beautiful Bill Act Could Lower Your Taxes: 4 Key Deductions to Know
Major changes are coming to your tax return. In July 2025, President Trump signed the One Big Beautiful Bill Act into law—a sweeping new tax law designed to put more money back in the hands of American workers, retirees, and everyday taxpayers.
With new tax deductions for 2025—covering tips, overtime pay, seniors, and even car loan interest—the law introduces four key opportunities to reduce your taxable income through 2028. These changes can help lower your adjusted gross income (AGI) and unlock additional tax benefits. Here's what you need to know—and how to make the most of these temporary but potentially valuable breaks.
1. Tax-Free Tips (Yes, Really)
What’s new:
You can now deduct up to $25,000 in cash tips from your taxable income under this 2025 tax law change.
Who qualifies:
This tax-free tip deduction begins to phase out if your Modified Adjusted Gross Income (MAGI) is over $150,000 (single) or $300,000 (married filing jointly).
Heads-up:
This applies only to federal income taxes; Social Security, Medicare, and state or local taxes still apply.
Pro tip for service industry workers:
If you're a server, stylist, valet, or gig worker, keep your cash tips well-documented and separate from digital ones (which are still fully taxable). Be sure to report them correctly using IRS Form 4137.
2. Overtime Pay Gets a Break
What’s new:
You can deduct up to $12,500 in overtime pay (or $25,000 for joint filers) directly from your taxable income—another necessary deduction introduced in the One Big Beautiful Bill Act.
Phase-out thresholds:
Similar to the tip deduction, this overtime tax deduction phases out at a MAGI of $150,000 for single filers or $300,000 for joint filers.
Key requirement:
To qualify, your overtime pay must be reported separately on your W-2.
Take advantage:
Discuss with your employer the option to separate regular and overtime wages on your W-2. Without that clear breakout, you won’t be eligible for this deduction and could miss out on thousands in tax savings.
3. $6,000 Senior Deduction
What’s new:
This senior tax deduction, introduced in 2025, allows taxpayers aged 65 and older to deduct up to $6,000 each, a big jump from previous deduction amounts.
Phase-out starts at:
$75,000 MAGI (single)
$150,000 MAGI (joint)
It phases out completely above $175,000 and $250,000, respectively.
Why it matters:
This deduction can reduce the amount of your Social Security income that's taxed, especially if you're near the threshold.
Smart move for retirees:
If you're close to the income limit, consider strategies to lower your adjusted gross income—like contributing to an HSA or traditional IRA—to help you qualify.
4. Car Loan Interest Deduction
What’s new:
You can now deduct up to $10,000 per year in interest paid on car loans—but only if the vehicle was assembled in the U.S. This car loan interest deduction was designed to boost domestic manufacturing and reward everyday car buyers.
Who qualifies:
The full deduction is available for MAGI under $100,000 (single) or $200,000 (joint); it phases out above those thresholds.
Documentation is key:
You’ll need to prove your vehicle’s final assembly was domestic and identify the interest portion of your payments.
Helpful tip:
Save your loan paperwork and use a VIN decoder or the vehicle's window sticker to verify the assembly location. Without that, you may not be eligible to claim the deduction.
What This Means for You
Each of these new deductions is above-the-line, meaning they reduce your Adjusted Gross Income (AGI), potentially unlocking additional tax credits and savings. However, each one also includes income-based phase-outs, so your eligibility depends on careful tracking of your Modified Adjusted Gross Income (MAGI). The bottom line: thoughtful planning now can make a big difference when you file.
Want to take advantage of these new deductions? It starts with good planning. Check out our post on Smart Mid-Year Moves to Lower Your Tax Bill for strategies to manage your income and stay under key MAGI thresholds.
Frequently Asked Questions (FAQ)
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Yes! You must report your cash tips on IRS Form 4137 or directly on your Form 1040. Keeping a daily log or using a tip-tracking app is a smart way to stay organized and ensure compliance.
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No. Overtime is still taxed, but under the new law, you may be eligible for an above-the-line deduction—but only if the overtime is reported separately on your W-2.
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MAGI stands for Modified Adjusted Gross Income—your AGI with certain items added back, like tax-exempt interest or foreign income. The new deductions in the bill phase out above specific MAGI limits, so managing your income strategically is key.
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No. The deduction applies only to vehicles that were assembled in the U.S. You’ll need documentation (such as a window sticker or VIN lookup) to verify this, and only the interest portion of the loan is deductible.
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Consider contributing to a Traditional IRA, HSA, or employer-sponsored retirement plan. Income deferral strategies or certain business deductions may also help. Your CPA can walk you through the best approach for your situation.
Need Help Navigating the New Tax Rules?
Tax law changes can be overwhelming, but you don’t have to navigate them alone. At Carlson Hearne CPA, we help you understand how these new deductions apply to your specific situation, plan strategically to reduce your tax liability, and stay compliant with documentation and reporting. Whether you're a retiree, business owner, service worker, or want peace of mind, we're here to guide you every step of the way.
Let’s make sure you don’t leave money on the table. Contact us today to start planning for the 2025 tax season!