Compliance
WFTC Deductions for Tips, Overtime & Car Loan Interest: How to Prepare for Filing 2025
Working Families Tax Cuts introduce new deductions for qualified tips, overtime, and car loan interest. Here’s what records to have, how to file, and avoid surprises.
By NomadicTax Research Team • 5-8 min read • July 9, 2026
## The New Deductions & Where to Find Them
The **Working Families Tax Cuts (WFTC)** act introduced **three major temporary deductions** for tax years **2025 through 2028**:
- **Qualified Tips Deduction**: For tips that are volunteered or paid and for which you’ve kept records. Note: these tips probably won’t be separately listed on W-2 or 1099 forms. ([irs.gov](https://www.irs.gov/newsroom/what-you-will-need-to-file-your-taxes-under-working-families-tax-cuts?utm_source=openai))
- **Qualified Overtime Compensation Deduction**: Pay stubs / payroll showing overtime are required. Same note—OT not separately identified on standard forms. ([irs.gov](https://www.irs.gov/newsroom/what-you-will-need-to-file-your-taxes-under-working-families-tax-cuts?utm_source=openai))
- **Qualified Passenger Vehicle Loan Interest**: Deduction up to **$10,000** per year where conditions are met (vehicle is new, used for personal use, etc.). Lease payments generally **do not qualify**. ([irs.gov](https://www.irs.gov/newsroom/what-you-will-need-to-file-your-taxes-under-working-families-tax-cuts?utm_source=openai))
## Documentation & Preparation Steps
To claim these deductions correctly, gather and retain:
- All **W-2, 1099, or 1099-K forms** for 2025 showing total amounts (tips, overtime, etc.) included in wages. Even if tips/overtime aren’t separated, count them toward line items. ([irs.gov](https://www.irs.gov/newsroom/what-you-will-need-to-file-your-taxes-under-working-families-tax-cuts?utm_source=openai))
- Daily or weekly tip logs, employer reports, POS summaries, invoices for tip income.
- Pay stubs or payroll summaries that show your overtime pay. If you changed jobs or held multiple tipped or OT positions, collect for each trade.
- Vehicle loan documentation: original use requirement, VIN, purchase/trade details, proof loan interest paid, vehicle weight & type.
## Where on the Return & What to Watch For
- Use **Schedule 1-A**, Parts II-IV, to report WFTC deductions. Totals then transfer to Form 1040 line 13b (or 13c for nonresident aliens). ([irs.gov](https://www.irs.gov/newsroom/what-you-will-need-to-file-your-taxes-under-working-families-tax-cuts?utm_source=openai))
- Be aware: forms **won’t separately itemize tips or overtime**, meaning it’s on you to document and interpret these amounts accurately. Misreporting could lead to penalties.
- These deductions are **temporary**, only in effect for tax years 2025 through 2028. Plan accordingly.
## Example Situations
**Scenario A:** Laura works as a server and posts consistent tips. She didn’t receive a separate tip amount on her W-2 but has weekly logs and POS data. She can claim the tips deduction using Schedule 1-A, documenting thoroughly.
**Scenario B:** Mike has a car loan for a passenger vehicle meeting criteria and paid interest on it in 2025. He can deduct up to $10,000 if the vehicle is new and not leased. If the vehicle is leased, he cannot.
**Scenario C:** Fatima held two jobs where she regularly did overtime. She needs to obtain overtime pay records from both employers and report totals, even if not separately shown.
## Common Pitfalls & How to Avoid Them
- **Not keeping direct records**: Without tip logs or overtime records, you may lack evidence. Always retain records.
- **Misclassifying types of vehicles**: Interest on qualifying passenger vehicle loan is allowed only for **new applicable vehicles**, not heavier vehicles or used ones.
- **Missing deadlines**: WFTC deductions require filing the correct schedules and proper documentation; missing these may disqualify the deduction.
## Planning Tips for 2026 & Beyond
- Begin collecting detailed documentation now to support your 2025 returns.
- Budget accordingly: these deductions may reduce taxable income, but you may still owe estimated taxes.
- Monitor income thresholds for deductions like the senior enhanced deduction, which might phase out depending on MAGI.
With proper preparation and documentation, claiming these new WFTC deductions can reduce 2025 tax liability significantly. Carefully track all moving parts.