IRS releases draft Schedule 1-A for tax breaks on tips, overtime, car loan interest, seniors

The Internal Revenue Service has posted a draft version of Schedule 1-A, "Additional Deductions," for Form 1040 that will be used next tax season when claiming new tax breaks in the One Big Beautiful Bill Act for no tax on tips, overtime, car loan interest and the enhanced deduction for senior citizens.

The release of the draft form comes only a few weeks after the IRS released a draft version of the Form W-2, "Wage and Tax Statement," which also contains some new fields and box codes for the tax exemptions on tips and overtime. The draft version of Schedule 1-A refers to some of these new fields on Form W-2. It also refers to instructions that haven't yet been released for the draft form, along with Form 1099-NEC, "Non-employee Compensation," Form 1099-MISC, "Miscellaneous Information," and Form 1099-K, "Payment Card and Third Party Network Transactions." 

The draft of Schedule 1-A includes separate parts for no tax on tips, no tax on overtime, no tax on car loan interest, and the enhanced deduction for seniors. For the tips, overtime and car loan interest tax breaks, taxpayers are told they need to have a value Social Security number to claim the deduction. Taxpayers also need to have received qualified tips or overtime compensation or have paid or accrued qualified passenger vehicle loan interest to qualify for the respective tax breaks. If taxpayers are married, they need to file jointly to claim the tax breaks for tips, overtime and the senior deduction.

The "no tax on tips" tax break phases out for taxpayers with modified adjusted gross income of $150,000 or less (or $300,000 for joint filers, according to an IRS fact sheet. On the new draft form, when it comes to figuring qualified tips, taxpayers are instructed to check to see if Form W-2, box 5, is $176,100 or less, and then they should enter qualified tips included in Form W-2, box 7. Otherwise, they should consult the yet-to-be-released instructions for the form. 

If qualified tips are included on Form 4137, line 1(c), they enter that amount. If Form 4137 is not filed, taxpayers would enter 0.

If taxpayers only received qualified tips from one employer, they would enter the larger of line 4a or line 4b. Otherwise, they should consult the instructions.

For qualified tips received in the course of a trade or business, the qualified tip amount is included in Form 1099-NEC, box 1; Form 1099-MISC, box 3; or Form 1099-K, box 1a. But taxpayers are instructed not to enter more than the net profit from the trade or business. If they received qualified tips in the course of more than one trade or business, they are advised to see the instructions.

For the no tax on overtime provision, the maximum annual deduction is $12,500 (or $25,000 for joint filers), and that's reflected on the schedule. On line 14a and 14b, taxpayers enter the qualified overtime compensation that will be included on Form W-2, box 1, Form 1099-NEC, box 1 or Form 1099-MISC, box 3. Then on line 15, taxpayers enter the smaller of the amount on line 14c or $12,500 ($25,000 if married filing jointly) 

For the no tax on car loan provision, the maximum annual deduction is $10,000. The deduction phases out for taxpayers with modified adjusted gross income over $100,000 ($200,000 for joint filers). Those amounts are also reflected on the new schedule. 

For the enhanced deduction for seniors, taxpayers who are age 65 and older can claim an additional deduction of $6,000, but the deduction phases out for taxpayers with modified adjusted gross income over $75,000 (or $150,000 for joint filers). Those amounts also show up in that part of the schedule when calculating the deduction.