The short answer
A federal tax law enacted on July 4, 2025 (Public Law 119-21, which the IRS now also calls the Working Families Tax Cuts) changed several rules for individuals. Many changes apply starting with your 2025 return, not 2026. Others first apply in 2026. This guide separates the two and links to detailed guides for the biggest changes.
Four new deductions — for qualified tips, qualified overtime compensation, car loan interest, and seniors — are claimed on a new form, Schedule 1-A. They are available whether you take the standard deduction or itemize, and the IRS describes them as effective for 2025 through 2028. They are deductions with limits and income phaseouts, not blanket tax exemptions.
Changes that start with your 2025 return
| Change | What it means for 2025 | Details |
|---|---|---|
| Standard deduction | $15,750 single or married filing separately; $31,500 married filing jointly; $23,625 head of household | Do I need to file? |
| Child Tax Credit | Up to $2,200 per qualifying child; up to $1,700 refundable; Social Security number requirements apply | Child Tax Credit guide |
| Qualified tips deduction | Up to $25,000; reduced when modified adjusted gross income (MAGI) is over $150,000 ($300,000 joint) | No Tax on Tips |
| Qualified overtime deduction | Up to $12,500 ($25,000 joint) of the overtime premium; same MAGI phaseout as tips | No Tax on Overtime |
| Enhanced deduction for seniors | Up to $6,000 per person age 65 or older; reduced when MAGI is over $75,000 ($150,000 joint) | Senior deduction |
| Car loan interest deduction | Up to $10,000 of qualified passenger vehicle loan interest; reduced when MAGI is over $100,000 ($200,000 joint) | See below |
| State and local tax (SALT) limit | $40,000 ($20,000 married filing separately) for people who itemize; reduced at higher incomes | SALT deduction |
| Form 1099-K reporting | Payment apps and online marketplaces report when payments exceed $20,000 and there are more than 200 transactions | Form 1099-K guide |
| Adoption credit | Up to $5,000 of the credit can be refundable | IRS adoption credit information |
Read more: Do I need to file? · Child Tax Credit · No Tax on Tips · No Tax on Overtime · The new senior deduction · SALT deduction · Form 1099-K
Changes that first apply in 2026
| Change | What it means for 2026 |
|---|---|
| Inflation adjustments | Standard deduction $16,100 single; $32,200 married filing jointly; $24,150 head of household. The Child Tax Credit stays at $2,200 per child, with up to $1,700 refundable. Maximum Earned Income Tax Credit $8,231 |
| Charitable deduction if you do not itemize | Up to $1,000 of cash contributions to eligible charities ($2,000 married filing jointly). Some gifts, such as contributions to donor-advised funds, do not qualify |
| Child and Dependent Care Credit | The maximum credit rate rises from 35% to 50% of qualifying expenses; the expense limits stay at $3,000 (one person) and $6,000 (two or more) |
| State and local tax (SALT) limit | For people who itemize: $40,400 ($20,200 married filing separately); reduced when MAGI is over $505,000 ($252,500 married filing separately), but not below $10,000 ($5,000) |
| 1099-NEC and 1099-MISC reporting | The minimum reporting threshold for many payments rises from $600 to $2,000; some payments, such as royalties, keep other thresholds |
| New Form W-2 codes | Employers report cash tips (box 12, code TP), qualified overtime (box 12, code TT), and Trump account contributions (box 12, code TA) |
| Trump Accounts | Contributions began July 4, 2026; the IRS describes a one-time $1,000 federal contribution for each eligible child and contributions of up to $5,000 per year |
The new deductions for tips, overtime, car loan interest, and seniors continue for 2026. For 2026 tips and overtime, employers report the amounts on Form W-2, which changes how you find the numbers — see the tips and overtime guides. The IRS has not yet published final 2026 Schedule 1-A instructions. More detail: charitable donations in 2026 · Child and Dependent Care Credit · Trump accounts
How the four new deductions work
All four are figured on Schedule 1-A and entered on Form 1040, line 13b. They are taken after adjusted gross income, in addition to your standard deduction or itemized deductions. Each one starts from your modified adjusted gross income (MAGI) in Part I of Schedule 1-A. For the tips, overtime, and senior deductions, married people must file a joint return, and the person who received the tips or overtime, or who is claiming the senior deduction, needs a Social Security number valid for employment. The car loan interest deduction has different requirements — see below.
| Deduction | Maximum | Phaseout starts above (MAGI) | Reduction |
|---|---|---|---|
| Qualified tips | $25,000 per return | $150,000 ($300,000 joint) | $100 for each full $1,000 over |
| Qualified overtime | $12,500 ($25,000 joint) | $150,000 ($300,000 joint) | $100 for each full $1,000 over |
| Car loan interest | $10,000 | $100,000 ($200,000 joint) | $200 for each $1,000 or part of $1,000 over |
| Seniors (age 65+) | $6,000 per eligible person | $75,000 ($150,000 joint) | 6% of MAGI over the threshold |
The car loan interest deduction
You may deduct up to $10,000 a year of interest on a loan used to buy a qualifying vehicle for personal use. According to the IRS, the loan must have originated after December 31, 2024, be secured by a first lien on the vehicle, and be used to buy a vehicle whose original use began with you. The vehicle must be a car, minivan, van, SUV, pickup truck, or motorcycle with a gross vehicle weight rating under 14,000 pounds that underwent final assembly in the United States. Lease payments do not qualify, and you must include the vehicle identification number (VIN) on your return. See the car loan interest deduction guide for details.
This guide covers federal income tax. State tax rules can differ from federal law, so do not assume your state allows the same deductions. Check your state tax agency's guidance.
Common misconceptions
- "Everything starts in 2026." Many changes, including the four Schedule 1-A deductions and the higher SALT limit, apply to 2025 returns.
- "Tips and overtime are now tax-free." They remain taxable income subject to Social Security and Medicare taxes; the deductions are limited and phase out at higher incomes.
- "I have to itemize to get the new deductions." The Schedule 1-A deductions are available with the standard deduction too. Only the SALT deduction requires itemizing.
- "The senior deduction replaces the extra standard deduction for age 65." It is in addition to the existing additional standard deduction.