What’s New Under Working Families Tax Cuts (WFTC)
Enacted under the One, Big, Beautiful Bill Act (Public Law 119-21), the Working Families Tax Cuts bundle multiple new deductions, expanded credits, and updated tax thresholds that affect tax years 2025 through 2028. (irs.gov)
Key changes include:
- No tax on tips: Up to $25,000 in “qualified tips” may be deducted by employees or self-employed persons per year (phases out for high-income taxpayers). (irs.gov)
- No tax on overtime extra pay: Portion of overtime pay above regular rate (the “half” portion) deductible up to $12,500 (or $25,000 for joint filers). (irs.gov)
- Car loan interest deduction: Interest on a personal loan used to buy a qualified vehicle (originally used, < 14,000 lbs, final assembly in US) may be deductible up to $10,000/year, for 2025-2028. Lease payments don’t qualify. (irs.gov)
- Standard deductions and tax brackets updated for inflation for TY 2026:
- Married filing jointly: $32,200
- Single or married filing separately: $16,100
- Head of household: $24,150 (irs.gov)
- AMT (Alternative Minimum Tax) exemption increase; qualified adoption credit increased; employer-provided childcare credit limit raised. (irs.gov)
How It Impacts Your Tax Planning
- Lower taxable income for service industry workers: Tip-earnings more cleanly deductible—helps those in restaurants, gig work, hospitality.
- Overtime workers benefit: Extra overtime compensation above regular rate is no longer fully taxed—reduces marginal tax increases for higher overtime hours.
- Auto loan interest now relevant: If you recently financed a personally used qualifying vehicle, this deduction could be meaningful—especially for middle-income taxpayers.
- Standard deduction increases tighten phase-outs: Increased thresholds push more income into lower brackets; other deductions or credits with income limits may phase out differently.
What You Need To Do When Filing TY 2025 (returns in 2026)
- Use Schedule 1-A attached to Form 1040 to report:
- Qualified tips (Part II)
- Qualified overtime compensation (Part III)
- Qualified car-loan interest deduction (Part IV) (irs.gov)
- Preserve detailed records:
- Tip logs, employer reports, or invoices if self-employed
- Payroll statements showing overtime
- Vehicle loan agreement, manufacturer final assembly info, VIN, lender statements
- Confirm value of credits/deductions against MAGI thresholds (phases outs) to maximize benefit.
Example Calculation
Suppose Maria is single, earned $60,000 in wages including $3,000 tips, and made $2,500 in overtime pay in 2025. She also has interest payments on a qualifying vehicle loan of $4,000. Under new rules:
- Tips deduction: $3,000 (if reported) because total under $25,000.
- Overtime deduction: portion above regular pay (say $1,250 if half of overtime pay is “extra”) or full eligible if documented.
- Car loan interest deduction: $4,000 (if vehicle qualifies) limited by $10,000 cap.
These deductions reduce taxable income—pushing Maria into a lower bracket or increasing her refund/ lower liability."
Heads-Up Things to Watch Out For
- These deductions are temporary: Apply only through 2025-2028, so plan accordingly. (irs.gov)
- Not every expense qualifies—vehicle must meet criteria; overtime must be properly documented.
- Reporting changes: Forms W-2 or 1099 may not separately list tips or overtime—your personal records become more critical. (irs.gov)
- Income phase-outs could reduce or eliminate benefit for high earners.
Final Thought: These changes offer significant relief to many working Americans, especially in service, tip-earning, hourly, and vehicle-owning segments. If you think you qualify, gather your documentation now so you can maximize deductions when you file.