New Tax Breaks for Tips, Overtime, and Car Loans Aren’t Quite What They Seem by Sheryl Rowling

 These three new tax deductions offer some relief but come with significant limitations.

As a certified public accountant, my job is to give you the real scoop on tax legislation. The Omnibus Budget and Balanced Budget Act of 2025, or OBBBA, signed into law on July 4, 2025, has generated buzz about “great benefits” for taxpayers. I’m here to tell you these benefits might not be as grand or as widespread as advertised. Let’s look at three provisions touted as tax breaks:

1) Your Tips: Not So Tax-Free After All

The OBBBA offers an “above-the-line” deduction for qualified tips, capped at $25,000 for singles ($50,000 for married couples). This is temporary for tax years 2025-28.

The 4 Rules for Cash: How to Manage Your Money the Smart Way

Here’s why it’s not the windfall many expect:

• Limited by Your Tax Bracket: Your federal income tax savings directly depend on your tax bracket. If you’re in a lower bracket, your actual dollar savings will be smaller. Example: Karen, in the 12% federal tax bracket, earns $8,000 in qualifying tips. Her federal tax savings? Just $960 ($8,000 x 0.12).
• Payroll Taxes Still Apply: This is key! While you get an income tax deduction, your tips remain subject to Social Security and Medicare, or FICA, taxes. Your share is 7.65%. Example: Polly, a server, reports $30,000 in tips in 2025. Even with a potential $25,000 federal income tax deduction, she’ll still owe $1,912.50 in FICA taxes on that $25,000 ($25,000 x 7.65%).
• Income Limitations: The deduction phases out for those with modified adjusted gross income over $150,000 ($300,000 for joint filers). For every $1,000 over, your deduction drops by $100. High earners could see little or no benefit. Example: Terry, a maître d’, has a 2025 adjusted gross income of $160,000, including $28,000 in tips. His AGI is $10,000 over the $150,000 threshold. His $25,000 tip deduction is reduced by $1,000 ($10,000/$1,000 x $100), leaving him with a $24,000 deduction.
• Reporting Matters: Only “qualified tips” reported to your employer on Form W-2 (or Form 1099 for contractors) are eligible. No reporting, no deduction.

 

2) Overtime: The ‘No Tax’ Illusion

The OBBBA also offers a temporary federal income tax deduction for “qualified overtime compensation,” capped at $12,500 for singles ($25,000 for married couples) for tax years 2025-28.

Here’s the reality:

• Tax-Bracket Impact: Like tips, your federal tax savings are tied to your tax bracket. Example: Bill, in the 12% federal bracket, earns $5,000 in qualified overtime. He saves only $600 in federal taxes.
• Still Subject to Payroll Taxes: Overtime earnings, including the deductible portion, are still hit with FICA taxes. Example: Sarah earns an extra $15,000 in qualifying overtime. Even if she deducts $12,500 from her federal taxable income, she’ll still pay $956.25 in FICA taxes on that deductible amount ($12,500 x 7.65%).
• Limited to Premium Pay: Only the extra portion of your overtime pay qualifies. If your regular rate is $20 per hour and overtime is $30 per hour, only the $10 premium per hour is deductible.
• Income Limitations: This deduction phases out for singles with AGI over $150,000 ($300,000 for joint filers), reducing by $100 for every $1,000 over. Example: Steve’s AGI is $170,000, including $14,000 in qualified overtime premium. His deduction limit is $12,500. Being $20,000 over the threshold, his deduction is reduced by $2,000 ($20,000/$1,000 x $100), leaving him with a $10,500 deduction.
• FLSA Overtime Only: The deduction applies specifically to overtime required by the Fair Labor Standards Act. State-mandated or contractual overtime generally doesn’t qualify.

6 More Retirement Financial Myths to Avoid

3) Deducting Car Loan Interest: A Short Ride

The OBBBA introduces a new, temporary above-the-line deduction for interest paid on car loans. For 2025-28, you can deduct up to $10,000 annually on interest for loans on new vehicles with final assembly in the United States.

Why this perk might not be what you imagine:

• Tax-Bracket Impact: Again, your tax savings depend on your bracket. Example: Nick, in the 12% federal bracket, pays $4,000 in qualified car loan interest. He saves $480 in federal taxes.
• New and U.S.-Assembled Restrictions: This is a major hurdle. It’s only for new cars (no used cars) whose final assembly took place in the US. Example: Maria buys a used car, paying $1,500 in interest. No deduction. Chris buys a new car assembled in Germany, paying $2,000 in interest. Still no deduction.
• Income Limitations: This deduction also phases out for single filers with adjusted gross income over $100,000 ($200,000 for joint filers), reducing at a 20% rate for every dollar over the threshold. Example: Janet, a single filer with an AGI of $120,000, pays $8,000 in qualifying interest. Being $20,000 over the $100,000 threshold, her $8,000 deduction is reduced by $4,000 ($20,000 x 0.2), allowing only a $4,000 deduction.

The Bottom Line

Approach these tax breaks with skepticism. While they offer some relief, they’re far from universal and come with significant limitations. Don’t assume you’ll hit the jackpot because a headline sounds good. Always read the fine print and, better yet, consult a tax professional to understand how these provisions have an impact on your unique financial situation