Schedule 1-A: New 2025 Tax Deductions Explained

If you're filing your 2025 tax return and wondering about the new deductions you've been hearing about — no tax on tips, no tax on overtime, car loan interest, and the senior deduction — they all live on one brand-new form: IRS Schedule 1-A.

Released on March 2, 2026, Schedule 1-A is how you claim the four new below-the-line deductions created by the One, Big, Beautiful Bill Act (OBBBA). Whether you qualify for one or all four, this is the form that gets it done.

What "Below-the-Line" Means for You

Before diving into each deduction, there's one critical distinction to understand. These are below-the-line deductions, which means:

• They reduce your taxable income, lowering the tax you owe
• They do not reduce your adjusted gross income (AGI)
• That means they won't improve your eligibility for AGI-dependent credits like the Earned Income Tax Credit, Child Tax Credit, education credits, or Roth IRA contribution limits

They also don't eliminate payroll taxes. Tips and overtime remain subject to Social Security (6.2%) and Medicare (1.45%) taxes. The "no tax" branding refers specifically to federal income tax.

Part II: No Tax on Tips (Up to $25,000)

The tips deduction allows workers in tipped occupations to deduct up to $25,000 in qualified tips from their taxable income.

Who Qualifies

• You work in an occupation that customarily and regularly receives tips, as identified by IRS Treasury Tipped Occupation Codes (68 qualifying occupations)
• Common examples: wait staff, bartenders, salon workers, delivery drivers, personal trainers, rideshare drivers
• Tips must be reported on Form W-2, Form 1099-NEC, Form 1099-MISC, Form 1099-K, or Form 4137
• You must have a valid Social Security Number (ITINs do not qualify)
• If married, you must file jointly

What Doesn't Qualify

• Mandatory service charges or auto-gratuities — under Revenue Ruling 2012-18, these are classified as wages, not tips
• Tips earned in a Specified Service Trade or Business (SSTB) under Section 199A
• Tips not reported to the IRS

2025 Filing Note

For tax year 2025, the W-2 Box 12 code "TP" for qualified tips does not exist yet. You'll need to calculate your qualifying tips manually from pay stubs, Form 4070A tip logs, or Form 4137. Starting in 2026, employers must separately report qualified tips using the TP code.

Part III: No Tax on Overtime (Up to $25,000)

This deduction covers the premium portion of qualified overtime compensation — not the full overtime pay.

The Critical Distinction

If your regular rate is $30/hour and your overtime rate is $45/hour (1.5x), the deductible premium is only $15/hour — the extra half, not the full $45. The IRS provides a safe harbor: qualifying premium = 1/3 of total overtime pay at the 1.5x rate.

Who Qualifies

• Must be covered by the Fair Labor Standards Act (FLSA) and not exempt from overtime requirements
• Only hours exceeding 40 per workweek at the required 1.5x rate qualify
• Federal employees: check Standard Form 50, Block 35 — "N" means eligible, "E" means exempt
• Maximum deduction: $12,500 (single/MFS) or $25,000 (MFJ)

What Doesn't Qualify

• State-only overtime — California's daily overtime (after 8 hours) does not qualify unless it also meets FLSA Section 7 requirements (over 40 hours/week)
• Union contract premiums beyond FLSA minimums
• Holiday double-time or shift differentials
• FLSA-exempt salaried employees (administrative, executive, professional, computer, outside sales exemptions)
• Self-employed individuals — this is employees only

2025 Filing Note

Like tips, the W-2 Box 12 code "TT" for overtime does not exist for 2025. Calculate manually from pay stubs. Starting 2026, employers must report overtime separately — and only separately reported amounts will be deductible going forward.

Part IV: Car Loan Interest Deduction (Up to $10,000)

This is a deduction for interest paid on loans for new, American-assembled vehicles purchased for personal use.

Eligibility Requirements

• Loan must have been originated after December 31, 2024
• Vehicle must be new — original use begins with you (no used vehicles, regardless of mileage)
• Vehicle must have final assembly in the United States (verify via the NHTSA VIN Decoder or Monroney window sticker)
• Gross vehicle weight rating must be under 14,000 pounds
• Loan must be secured by a first lien on the vehicle
• You must report the VIN on Schedule 1-A
• If married, you must file jointly

Assembly Location Matters, Not Brand

A Toyota Camry assembled in Georgetown, Kentucky qualifies. A Ford Maverick assembled in Hermosillo, Mexico does not. Always verify final assembly location — don't assume based on the brand name.

What Doesn't Qualify

• Used vehicles — no exceptions, even for low-mileage or certified pre-owned
• Lease payments — only loan interest qualifies
• Business vehicles — these are deductible through other provisions (Section 179, depreciation)
• Loans from a relative
• Refinanced loans where the original loan predates January 1, 2025

Part V: Enhanced Senior Deduction (Up to $12,000)

This provides an additional deduction for taxpayers age 65 or older — on top of the existing additional standard deduction for seniors under IRC Section 63(f).

How It Stacks

For 2025, seniors already receive an extra standard deduction of $2,000 (single/HoH) or $1,600 per spouse (MFJ). The new enhanced senior deduction adds:

• $6,000 for a single qualifying taxpayer
• $6,000 for MFJ where one spouse is 65+
• $12,000 for MFJ where both spouses are 65+

That means a single filer age 65+ could get: standard deduction ($15,350) + existing senior addition ($2,000) + new enhanced deduction ($6,000) = $23,350 in total deductions before even itemizing.

Key Requirements

• Must be age 65 or older by December 31 of the tax year (born before January 2, 1961 for 2025)
• Valid Social Security Number required
• Must file jointly if married
• Must use the standard deduction — itemizers cannot claim this deduction

The Senior Cliff — Plan Carefully

Unlike the other three deductions that phase out gradually, the senior deduction uses a cliff structure:

Planning implication: If you're a senior near the phaseout threshold, the timing of IRA distributions, capital gains, or Roth conversions can make or break this deduction. One extra dollar above the cliff eliminates it entirely.

How Schedule 1-A Flows to Your Tax Return

Here's how the math connects:

1. Complete Schedule 1-A, Parts I through V
2. Part VI, Line 38 totals all four deductions
3. Line 38 transfers to Form 1040, Line 13b ("Additional Deductions from Schedule 1-A")
4. Your total deductions (Line 14) = standard or itemized deductions + QBI deduction + Schedule 1-A total
5. Taxable income (Line 15) = AGI minus total deductions

Common Mistakes to Avoid

State Tax Warning

Many states have not adopted the OBBBA deductions. New Jersey, for example, confirmed it does not conform. Check your state's position before assuming these deductions flow to your state return — you may owe state tax on income that's federally deductible under Schedule 1-A.

What This Means for Your 2025 Return

Schedule 1-A is one of the most impactful new forms in years. Between the four deductions, qualifying taxpayers could reduce their taxable income by $50,000 or more — but the eligibility rules, income phaseouts, and calculation methods are detailed enough that mistakes are easy to make.

If you're unsure whether you qualify or want to maximize these deductions alongside your broader tax strategy, contact TS CPA for a consultation. We're filing these forms right now for clients across the country and can make sure you're not leaving money on the table.