The 2026 Tax Changes: A Complete Guide to Schedule 1-A
Four new deductions, four different phase-outs, one new form — and the misunderstanding that costs people the most.
- All four new deductions are available whether or not you itemise. They sit on top of the standard deduction, not instead of it.
- Only the premium portion of overtime qualifies — the extra half in time and a half, not the whole overtime cheque.
- Car loan interest requires four separate conditions to all be true, and most vehicles fail at least one.
- Each deduction has its own income phase-out at its own threshold and its own reduction rate.
- All four are scheduled to expire after the 2028 tax year unless extended.
What changed, in one paragraph
For the 2026 filing season, four new federal deductions took effect: qualified tips up to $25,000, the qualified overtime premium up to $12,500 for single filers and $25,000 for joint filers, qualifying car loan interest up to $10,000, and a $6,000 bonus deduction for taxpayers aged 65 and over. They are claimed on a new form, Schedule 1-A.
The point almost everyone gets wrong
These are not alternatives to the standard deduction. They stack on top of it. A filer who takes the standard deduction — which is most filers — can still claim all four of these if they qualify.
This is unusual enough that a large number of people will underestimate their refund or, worse, assume the deductions do not apply to them because they do not itemise. If you take the standard deduction and you have qualified tips, qualified overtime, a qualifying car loan or are over 65, these still apply to you.
Qualified tips: what counts and what does not
The deduction covers voluntary cash and charged tips received in an occupation the IRS lists as customarily and regularly tipped. It is capped at $25,000 per return.
Mandatory service charges do not qualify, however they appear on the receipt. An automatic 18% added to a large party is a service charge, not a tip, even when it is passed to staff. This distinction catches out a lot of restaurant workers.
The phase-out begins at $150,000 of modified adjusted gross income, or $300,000 filing jointly, and reduces the deduction by $100 for every $1,000 above it, or any part thereof.
Tips remain subject to Social Security and Medicare tax in full, and most states tax them normally. Only federal income tax is reduced.
Qualified overtime: only the premium half
This is the most misunderstood of the four. The deduction covers the amount paid above your regular rate, not the whole overtime payment.
Concretely: if your regular rate is $26 an hour and time and a half pays $39, the qualifying portion is the extra $13 per hour. The first $26 is ordinary wages taxed normally. At double time, the premium is the full $26, so double-time hours generate twice the deduction per hour worked.
Only overtime required under the Fair Labor Standards Act qualifies. Holiday premiums, weekend differentials, and overtime required solely by state law or a union contract generally do not.
The cap is $12,500 single, $25,000 joint, with the same phase-out thresholds as tips. Employers now report qualified overtime separately on the W-2, so check that the figure is there before filing.
Car loan interest: four conditions, all required
The vehicle must be new to you — original use must begin with you, so used purchases are excluded regardless of loan date. Final assembly must be in the United States, which is a plant location test and not a brand test. The loan must have originated after 31 December 2024. And it must be secured by the vehicle itself, so a personal loan used to buy a car does not qualify.
The VIN decoder settles the assembly question in about thirty seconds, and it regularly surprises people in both directions: several familiar domestic brands assemble abroad, and several foreign brands assemble domestically.
The cap is $10,000 of interest per year, phasing out from $100,000 of MAGI single or $200,000 joint, reducing by $200 per $1,000 — twice as fast as the tips and overtime phase-out. It therefore disappears entirely well below the income level most people expect.
Because loan interest is front-loaded, the deduction is largest in year one and shrinks every year afterwards.
The senior bonus deduction
Taxpayers 65 or older by the end of the tax year get an additional $6,000 deduction. If both spouses on a joint return are 65 or older, it doubles to $12,000.
The phase-out starts at $75,000 of MAGI single or $150,000 joint, and reduces by 6% of the excess — a different mechanism from the other three.
This sits on top of both the standard deduction and the existing additional amount for people over 65. It does not replace either. It is also frequently described in the press as making Social Security untaxed, which is not accurate: the rules for taxing Social Security benefits themselves have not changed. What has changed is that many retirees now have a larger deduction against total income.
Why one raise can wipe out one deduction and leave another intact
The four phase-outs use different thresholds and different rates. Tips and overtime start reducing at $150,000. Car loan interest starts at $100,000 and reduces twice as fast. The senior bonus starts at $75,000 and reduces by a percentage rather than a fixed amount.
The practical consequence is that a single income figure produces four different answers. Someone at $160,000 might retain most of a tips deduction, lose the car loan deduction entirely, and have no senior deduction to lose. Modelling all four together, rather than one at a time, is the only way to see the real effect.
The SALT cap change alongside them
Separately, the cap on deducting state and local taxes rose to $40,000 for 2025 through 2029, from the previous $10,000. Above $500,000 of MAGI it phases back down toward $10,000, and in 2030 it is scheduled to revert.
For homeowners in high-tax states this flips the itemise-or-not question that has had the same answer since the cap was introduced. If you stopped checking years ago because itemising never cleared the standard deduction, it is worth checking again.
What to do before you file
Check your W-2 for the new qualified tips and qualified overtime boxes. If you worked FLSA overtime and the box is empty, ask payroll before filing rather than after.
Decode your VIN if you bought a new vehicle on finance after the start of 2025. Add up your state and property tax against the new SALT cap. Then run all four deductions together against your actual MAGI to see what survives the phase-outs.
Finally, remember the sunset. All four apply through the 2028 tax year unless Congress extends them. Any multi-year plan built on them being permanent is built on an assumption rather than a rule.
Run your own numbers
The figures above describe the method. This is the same method with your inputs in it — change anything and the result updates immediately.
Common questions
Can I claim more than one of these?
Yes, they are independent. A 66-year-old server working FLSA overtime with a qualifying car loan could claim all four.
Do I need to itemise?
No. All four are below-the-line deductions on Schedule 1-A, available alongside the standard deduction.
Does this mean I pay no tax on tips at all?
No. Social Security and Medicare tax still apply in full, and most states tax tips normally. Only federal income tax is reduced, and only up to the cap.
What if my employer has not reported qualified overtime?
Ask payroll to correct it. The W-2 reporting is what substantiates the deduction, and fixing it before filing is far easier than amending afterwards.
Every figure on this page comes from a formula we publish rather than from an unattributed estimate. Where two established methods exist we show both and present the midpoint rather than the flattering one. Default values in the calculator are realistic starting points, not optimistic ones. We take no payment for coverage and no advertiser reviews our content before publication — see our editorial policy.
This is general information, not advice. Rules differ by state, carrier, lender and contract. Use it to prepare for a conversation with a qualified professional rather than to replace one.