Income phaseouts can reduce or eliminate new deductions for seniors, overtime, tips and car loan interest on 2025 federal tax returns.
IRS data shows average tax refund in 2026 will be higher
Tax season is here and new data from the Internal Revenue Service shows the average tax return will be higher this year.
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- New tax deductions for overtime pay, tips, seniors, and car loan interest don’t disappear immediately when income crosses a line.
- Some deductions, such as one for those 65 and older, end up being phased out completely more quickly than some imagine.
Wondering why, maybe, you didn’t get any extra refund cash from a new tax deduction for seniors? Or you somehow didn’t qualify for other new federal income tax breaks on tips, overtime and car loan interest?
While millions of people are seeing bigger tax refunds this year thanks to these new deductions, others are seeing far less extra cash than they might have imagined. One possible reason?
If you make too much money overall, you might receive only a partial deduction or no deduction at all on your 2025 federal income tax return for these new tax breaks. It’s important to understand how income phaseouts work for these deductions because these tax breaks will also exist in tax years 2026, 2027 and 2028.
At this point, tax experts say, the phaseout thresholds from 2025 through 2028 and are not indexed for inflation.
The four big tax breaks that were part of the One Big Beautiful Bill Act — deductions on tip income, overtime, new car loan interest and an enhanced deduction for those 65 and older — all come packed with complicated rules and restrictions, including income thresholds. These tax breaks are retroactive for all of 2025 even though the One Big Beautiful Bill was signed into law July 4 by President Donald Trump.
Oddly enough, each of these tax deductions tax has a different income limitation, which can make things even more confusing.
The way the deduction phases out, based on income, isn’t always the same, either. For example, experts note that both the car loan interest and senior deductions end much sooner once a taxpayer crosses a given income threshold than the deductions for tip income and overtime.
“One of the biggest misconceptions is the idea of an income ‘cliff,’ ” said April Walker, senior manager for tax practice and ethics with the American Institute of CPAs.
Yet, the deductions don’t automatically fall off a cliff.
“The new tax deductions for overtime pay, tips, seniors, and car loan interest don’t disappear all at once when income crosses a certain line,” Walker said. “But that’s exactly what many taxpayers think — and it’s causing unnecessary anxiety.”
Instead, she said, the amount allowed for a deduction phases out gradually as income rises. “Being slightly over the limit reduces the deduction by a small amount — not thousands of dollars,” Walker said.
We’re not just talking about wages. Income could be higher because of investment income or taking taxable income out of a regular 401(k) plan, too. Combined income can push taxpayers into phaseout ranges without expecting it.
And they “may also be surprised at how quickly the deduction phases out once it starts,” said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting in Riverwoods, Illinois.
“In general,” Luscombe said, “these phaseouts do tend to be faster than other tax code provisions.”
Here’s glance at how the income phaseouts work for each of the four deductions that are claimed on the new Schedule 1-A:
How the overtime deduction phases out
The maximum annual deduction on federal income tax returns for overtime pay is $12,500 for singles and $25,000 for a married couple filing jointly.
The overtime deduction starts being reduced once a taxpayer’s modified adjusted gross income for the tax year exceeds $150,000 if unmarried and exceeds $300,000 for a married couple filing a joint return. Married couples who file separately cannot claim the deduction.
The OT deduction phases out at a rate of $100 for each $1,000 over the threshold — similar to the phaseout for tip income.
The OT deduction is no longer available at all if an unmarried taxpayer’s modified adjusted gross income hits $275,000.
For married couples filing a joint return, the deduction is eliminated completely at a modified adjusted gross income of $550,000.
Carl Breedlove, principal tax research analyst at H&R Block, gave one example. Say John, who is unmarried, has a modified adjusted gross income of $170,000 and he earned $10,000 in overtime pay that would qualify for the deduction.
Given his income, he’s looking at being able to deduct $8,000 in overtime pay from his taxable income.
The reason? His modified adjusted gross income is $20,000 above the $150,000 threshold for a single person.
Take the $20,000 and divide it by $1,000 to reach 20. Multiply 20 by $100 and you hit a $2,000 reduction from John’s $10,000 of qualifying overtime income.
What is modified adjusted gross income? Essentially, it is calculated by adding back some income to your adjusted gross income.
On Schedule 1-A, you’re adding back any income from Puerto Rico that you excluded from AGI, as well as some income for U.S. citizens from Form 2555 that relates to foreign housing and foreign earned income, and income related to a tax break from Form 4563 for the exclusion of income from bona fide residents of American Samoa.
How the enhanced senior deduction works
The new, temporary “senior bonus” will enable many taxpayers 65 years old and older to deduct up to $6,000 in income from their federal returns. A married couple who are both 65 and older could deduct up to $12,000 in income.
Married couples who file separately cannot claim the enhanced senior deduction.
Tax professionals, though, note that some seniors are surprised when they cannot claim the maximum $6,000 or $12,000 deduction. How much you save in taxes will depend greatly on the size of the deduction that you’re able to claim, based on your income.
Higher-income seniors receive a smaller tax break or no tax break once the deduction starts phasing out for those with a modified adjusted gross income of $75,000 for unmarried seniors and $150,000 for joint filers. Married couples who file separately cannot claim the deduction.
The enhanced senior deduction phases out at a 6% rate for every $1,000 — or $60 per $1,000. It is fully phased out at $175,000 for single filers or $250,000 for joint filers.
Income limits on the tip income deduction
Wait staff, blackjack dealers, lounge singers and others who receive qualifying tip income might be able to claim a new deduction of up to $25,000 for tip income earned in 2025.
The deduction for tip income starts getting smaller, or phasing out, for unmarried taxpayers with a modified adjusted gross income over $150,000 and above $300,000 for married couples filing a joint return. Married couples who file separately cannot claim the deduction for tip income.
The deduction phases out at a rate that boils down to $100 for each $1,000 over the threshold.
The tax break on tip income completely phases out when one’s modified adjusted gross income is $400,000 for single filers and $550,000 for married couples filing a joint return.
Remember, if married, you’re looking at the modified adjusted gross income for the couple, not just the spouse who receives tip income.
Why car loan interest phases out faster
Higher-income households tend to buy more new cars, but many taxpayers could discover that they’ve hit the income limit required to qualify for the deduction for the interest they paid on new car loans.
Beginning on 2025 tax returns, new car buyers who qualify can take a new deduction of up to $10,000 in car loan interest during a given tax year. The new vehicle must be for personal use.
The new car loan deduction phases out by $200 for each $1,000 — or a portion thereof — of modified adjusted gross income above $100,000 for single filers and $200,000 for joint filers.
Many tax filers will lose more of the maximum $10,000 deduction than they’d imagine, given this formula. Go $10 above the $100,000 threshold for an unmarried tax filer and you’d see a $200 reduction in the car loan deduction.
“Technically, therefore, you could consider the top of the phaseout range to be $149,001 for singles and $249,001 for joint filers,” Luscombe said.
In simplest terms, many tax websites will note that the deduction for auto loan interest is no longer available at a modified adjusted gross income of $150,000 for single filers and $250,000 for joint filers.
The “or portion thereof” language is only used for the car loan interest deduction, not for the OT deduction, the enhanced senior deduction or the tips deduction, Luscombe noted.
A phaseout means that you will not qualify for the maximum tax break once your income hits that phaseout threshold. But you could qualify for some benefits if your income does not exceed the top income limit for claiming that specific deduction.
What’s unusual: Married couples who file separately cannot claim the deduction for overtime pay, tips, and the enhanced senior deduction. But the rule is different, tax experts now say, for new car loan interest.
“Taxpayers that file using the married filing separately filing status are able to claim the car loan interest deduction as long as they meet the other requirements for the deduction,” said Breedlove, of H&R Block.
Breedlove acknowledged that some confusion exists since the car loan deduction isn’t exactly like the other big deductions on Schedule 1-A.
Other restrictions: The deduction for car loan interest applies only to new cars, not used cars or leases. The new car or truck must have undergone final assembly in the United States, meaning it is physically put together at a U.S. factory before it is shipped to a dealer.
And yes, the steps involved between seeing a reduced deduction and losing out on the deduction entirely can be very confusing.
“The phaseout is not intuitive,” said Tom O’Saben, enrolled agent and director of tax content and government relations for the National Association of Tax Professionals.
In general, many taxpayers misunderstand that simply qualifying for a deduction isn’t the same as receiving the full amount of any deduction, such as the maximum deduction of $6,000 for adults 65 and older.
Breedlove, of H&R Block, noted that most tax software will determine the phaseouts for the taxpayer, but they can estimate their deduction by doing some of their own calculations, too.
O’Saben, who is based in Illinois, typically works with 500 to 600 clients from a wide range of income levels during a tax season. As a result, he said, the phaseout effects have become very noticeable as he prepares returns, particularly among retirees and upper-middle-income taxpayers.
“We are definitely seeing seniors hit these phaseouts sooner than they expect,” O’Saben said.
In some cases, O’Saben said, an older adult’s income has been driven higher by a required minimum distribution from a 401(k) or IRA.
Someone who is only able to deduct $2,000 for the enhanced senior deduction based on their income, for example, might only see a tax savings of $240 if they’re in a 12% marginal tax bracket.
By contrast, the tax savings would be $720 for someone who is able to deduct the full $6,000 for the enhanced senior deduction if they’re in a 12% marginal tax bracket.
Contact personal finance columnist Susan Tompor: [email protected]. Follow her on X @tompor.
