Key points covered in this article:

  • The IRS has released a draft of Schedule 1-A for the 2025 tax season, consolidating four new deductions introduced by the OBBBA: no tax on tips, overtime, car loan interest, and an enhanced deduction for seniors.
  • These deductions, available from 2025 to 2028, aim to reduce taxable income without affecting AGI, with specific eligibility criteria and phaseout thresholds based on MAGI.
  • Taxpayers should review eligibility, maintain proper documentation, and consult tax professionals to prepare for these deductions and avoid errors.

The IRS has released a new draft form for the 2025 tax season. Schedule 1-A (Form 1040) will allow taxpayers to report several new deductions created by The One Big Beautiful Bill (OBBBA) which was signed into law in July of this year. Previously, there wasn’t a specific place to report these deductions on any of the tax forms, necessitating a quick solution.

The draft form covers four deductions. The popular provisions are: no tax on tips, no tax on overtime, no tax on car loan interest, and an enhanced deduction for seniors. These provisions are grouped together for now because they have temporary status, running from 2025 through 2028. The IRS is accepting comments on the form at this time.

Overview of Schedule 1-A

Schedule 1-A is designed to be attached to Form 1040.  It puts all four of the previously mentioned deductions on one form, and each deduction has its own separate part of the form. Since each deduction relies on modified adjusted gross income (MAGI) to determine eligibility, it makes sense that the form starts with that calculation. The deductions on the form are all considered below the line, which means they reduce taxable income but do not change AGI.

This is important for tax planning. Many credits, like the Child Tax Credit or Lifetime Learning Credit, are tied to AGI. That’s also true for retirement contribution limits. These deductions are meant to lower the tax bill without affecting AGI, with at least the partial purpose of maintaining eligibility for those benefits. Here’s a preview of the form:

Part I: Modified Adjusted Gross Income

This section walks through the MAGI calculation. For most taxpayers, MAGI will be the same as AGI, but adjustments may apply for items such as tax-exempt interest or foreign income. As noted, this section will play a role in all of the other sections of the form.

Part II: No Tax on Tips

The IRS recently put out a list of 68 occupations that may qualify for this deduction. It covers restaurants, bars, salons, valet services, among others. These workers can deduct up to $25,000 of reported tips. It’s important that the tips are voluntary and that they are reported. Automatic or mandatory service charges do not qualify. For single filers, the deduction phases out once MAGI passes $150,000. For joint filers, the threshold is $300,000. Married couples must file jointly and both must have Social Security numbers.

Part III: No Tax on Overtime

Taxpayers working overtime are now allowed to deduct the premium portion of their overtime compensation. That is the “half” in time-and-a-half, not the entire amount. That’s an important distinction. The max deduction that can be taken is $12,500 for single filers and $25,000 for joint filers. The phaseout rules are the same as for the tip deduction; the thresholds are set at $150,000 and $300,000 of MAGI. Married couples must file jointly and have Social Security numbers.

Part IV: No Tax on Car Loan Interest

This provision is more complicated than the others. Up to a $10,000 deduction is available for interest on certain car loans. However, this deduction is narrow in terms of eligibility. First, it must be a new vehicle for personal use, not business or commercial use. The vehicle must qualify for weight of less than 14,000 pounds, and it must have final assembly in the United States. This can be verified by using the VIN Decoder tool. The form provides space for up to two VINs, and there are instructions for listing additional vehicle identification numbers.

Second, the loan must have originated in 2025; vehicles meeting the other qualifications but bought in years prior do not qualify. Leased vehicles do not qualify. The phaseout begins at $100,000/$200,000 MAGI for single and joint filers. It’s reduced by $200 for every $1,000 above the limit.

Part V: Enhanced Deduction for Seniors

Individuals 65+ or older (with a Social Security number and a birthdate before January 2, 1961) can claim an additional tax break of $6,000. A married couple in which both spouses qualify can claim $12,000. The phaseout begins at $75,000 MAGI for single filers and $150,000 for joint filers. The deduction is reduced by 6% of the amount above those levels. For example, a single individual age 65 or over earning $95,000 would be able to claim a deduction of $4,800.

Part VI: Total Additional Deductions

The last part of the form requires the taxpayer to add up the lines for all four deductions. They can be claimed simultaneously if all qualifications are met. This is the amount for total additional deductions that can be taken below the line here.

Next Steps for Taxpayers

Schedule 1-A is clearly labeled as a draft. The IRS does not accept draft forms, and it is subject to change before the 2026 filing season. That being said, there are steps that taxpayers can take now to prepare:

  • Review eligibility: Look at the four categories and determine which ones might apply. Keep phaseout thresholds in mind if income is near the limits.
  • Keep records: It is crucial to keep documentation. For tips, the income must be reported through payroll and put on the W-2 form. For overtime, pay stubs and payroll records will be needed to show that only the premium was deducted. Car loan interest will need loan statements and the VIN. Seniors only need to confirm age and filing status, but the IRS may still check eligibility.
  • Monitor IRS updates: It’s still just a draft, and line numbers or instructions could change at any time.
  • Consult a tax professional: A tax advisor can answer questions as well as calculate MAGI, apply the phaseout formulas, and ensure documentation is complete. Missing information or mistakes in reporting could result in denied deductions, and it may also increase audit risk.

Conclusion

OBBBA introduced many new tax provisions, and more updates are sure to come out soon. Until then, the draft of Schedule 1-A gives taxpayers a preview of how these four deductions will be reported. For more information, contact PBMares Tax Partner Charles Dean Smith, Jr.