IRS posts form for claiming new tax deductions

The Internal Revenue Service has published a new Schedule 1-A and updated instructions for claiming the new tax breaks in the One Big Beautiful Bill Act for tips, overtime, car loans, and senior citizens for tax year 2025.

The IRS released a draft version of the schedule last September. Part II of the new instructions explains how to determine the amount of qualified tips, how to claim the deduction, up to $25,000, and the phaseout for modified adjusted gross income greater than $150,000 ($300,000 for married taxpayers filing joint returns). 

Employees can claim the tip deduction whether they claim the standard deduction or itemize. To claim the deduction, tips must be reported, and married taxpayers must file a joint return. The new instructions also provide examples of different scenarios for tipped workers, worksheets to help tipped workers calculate their tipped income, and information on lists and categories of occupations where workers customarily and regularly receive tips, as well as definitions of qualified tips.

Overtime deduction

Part III of the new instructions discusses how certain employees can claim a deduction for overtime compensation they received. Married taxpayers must file a joint return to claim this deduction. Workers can claim this deduction whether they claim the standard deduction or itemize.

The new instructions describe how taxpayers can claim a deduction of up to $12,500 ($25,000 if married filing jointly) and explain how the deduction is reduced when their modified adjusted gross income exceeds $150,000 ($300,000 if married filing jointly).

The instructions define qualified overtime compensation as overtime compensation that is paid as required under section 7 of the Fair Labor Standards Act of 1938, and exceeds the amount of the employee's regular rate of pay. The instructions include illustrative examples and worksheets.

Car loan interest

Part IV of the new instructions explains how taxpayers can claim a deduction for car loan interest. Taxpayers can deduct qualified passenger vehicle loan interest whether they claim the standard deduction or itemize.

The instructions define terms such as "qualified passenger vehicle loan interest," "applicable passenger vehicle," "final assembly in the United States," and "personal use," and provide an example.

Senior citizens

Part V describes the enhanced deduction for senior citizens, which can be claimed whether they take the standard deduction or itemize. To claim the deduction, married couples need to file jointly.

To qualify for the enhanced deduction, the taxpayer (and/or the taxpayer's spouse, if filing a joint return) must have been born before Jan. 2, 1961. The taxpayer must have a valid Social Security number; if married filing jointly, each spouse who is claiming the enhanced deduction for seniors must have a valid SSN.

The maximum enhanced deduction for seniors is $6,000 per person. For married filing jointly, if both spouses were born before Jan. 2, 1961, and both have a valid SSN, the enhanced deduction for seniors is $12,000. The $6,000-per-person amount is reduced if the MAGI exceeds $75,000 ($150,000 for married couples filing jointly).

The IRS is encouraging taxpayers to file their tax returns electronically and to opt for direct deposit for faster, more secure refunds. Filing electronically reduces tax return errors because the tax software performs the calculations, flags typical errors, and prompts taxpayers for missing information.