IRS introduces Schedule 1-A to claim deductions for tips and overtime
Starting in tax year 2025, taxpayers will use a new Schedule 1-A to claim deductions created by the “One, Big, Beautiful Bill,” including deductions for tips, overtime pay, car loan interest, and seniors.
Overview
The IRS released Schedule 1-A and updated Form 1040 instructions explaining how taxpayers will claim several new deductions enacted in the One, Big, Beautiful Bill.
The schedule consolidates four new deductions:
tips
overtime compensation
passenger vehicle loan interest
enhanced deduction for seniors
These deductions apply beginning with 2025 tax returns and can be claimed whether a taxpayer takes the standard deduction or itemizes.
How the New Deductions Work
The instructions break the deductions into separate sections.
Deduction for tips
Workers can deduct qualified tips up to $25,000.
Key requirements:
Tips must be reported as income
Married taxpayers must file jointly
Deduction phases out when MAGI exceeds $150,000 ($300,000 joint)
The IRS instructions include worksheets and examples to help workers determine the amount of qualified tips.
The guidance also lists occupations where workers customarily receive tips and defines what qualifies as tip income.
Deduction for overtime compensation
Certain employees can deduct qualified overtime pay.
Maximum deduction:
$12,500 single
$25,000 married filing jointly
The deduction phases out when:
MAGI exceeds $150,000 ($300,000 joint)
Qualified overtime compensation must be paid under §7 of the Fair Labor Standards Act, meaning pay above the employee’s regular rate required under federal overtime rules.
The IRS instructions provide worksheets and examples to help calculate the deductible portion.
Deduction for car loan interest
Taxpayers may deduct interest paid on certain passenger vehicle loans.
The instructions define:
qualified passenger vehicle loan interest
applicable passenger vehicle
final assembly in the United States
personal use
The deduction applies regardless of whether the taxpayer itemizes deductions.
The guidance includes examples illustrating when vehicle loan interest qualifies.
Enhanced deduction for seniors
Taxpayers age 65 or older may claim an additional deduction.
Eligibility:
taxpayer (or spouse on a joint return) must be born before January 2, 1961
taxpayer must have a valid Social Security number
Maximum deduction:
$6,000 per person
$12,000 for married couples filing jointly
The deduction begins to phase out when MAGI exceeds $75,000 ($150,000 for joint filers).
Why It Matters
New reporting structure. Schedule 1-A becomes the central reporting mechanism for several high-profile deductions created by the law.
Non-itemizers benefit. All four deductions are available even if the taxpayer claims the standard deduction.
Income limits apply. Each deduction includes MAGI phaseouts that will affect eligibility for higher-income taxpayers.
Operational guidance. The instructions provide worksheets and definitions that will likely drive the implementation of tax software for 2025 returns.
The Takeaway
Congress created several politically popular deductions in the One, Big, Beautiful Bill. Schedule 1-A is the mechanism that makes them operational.
In practice, the biggest compliance impact will fall on tipped workers, overtime employees, and senior taxpayers, while tax software providers and payroll systems will need to incorporate the new reporting rules for the 2025 filing season.