The IRS has unveiled drafts of new tax forms for 2026, including a significant addition known as Schedule 1-A, Additional Deductions, aimed at implementing provisions from the recent One Big Beautiful Bill Act (OBBBA). This new schedule introduces various deductions for workers, particularly those in tipped and overtime positions.
The first step in utilizing Schedule 1-A involves calculating one’s modified adjusted gross income (MAGI), which will determine eligibility for the new deductions. Notably, the deductions, such as the “No Tax on Tips,” “No Tax on Overtime,” “No Tax on Car Loan Interest,” and an exception categorized as “Enhanced Deduction for Seniors,” each carry distinct qualifications and limitations.
### Tips Deduction Reporting and Calculation
Taxpayers receiving qualified tips, which include both cash and charged tips in designated occupations, can claim this new deduction from 2025 through 2028. The maximum annual deduction stands at $25,000 for general filers and is limited by the taxpayer’s net income for self-employed individuals.
To claim the deduction, one must possess a valid Social Security number and report qualifying tips from appropriate forms such as Form W-2 or Form 1099. The tentative deduction can either be the total qualifying tips or $25,000, whichever is lower. However, once MAGI exceeds certain thresholds—$150,000 for individual filers and $300,000 for joint filers—the deduction begins a phaseout process.
For example, if an individual has $25,000 in qualifying tips and a MAGI of $185,000, the total deduction will be adjusted to $21,500 after applying phaseout calculations.
### Overtime Deduction Reporting and Calculation
Similar to the tips deduction, a new deduction for qualified overtime compensation allows for claims regardless of whether deductions are itemized. The amount that exceeds the regular pay rate, specifically the additional half of overtime pay, qualifies for this deduction, with a cap of $12,500 per year (or $25,000 for joint filers).
Emphasis remains on reporting overtime pay through the appropriate tax forms and ensuring a valid Social Security number is available. The MAGI phaseout mechanism mirrors that of the tips deduction, with calculations performed on gross income exceeding $150,000 for individuals and $300,000 for joint filers. It is possible for a taxpayer to see the maximum deduction reduced significantly due to income thresholds.
### Car Interest Deduction Reporting and Calculation
The car interest deduction, effective from 2025 through 2028, enables taxpayers to deduct interest paid on loans for purchasing eligible vehicles. To qualify, the vehicle must have been purchased after December 31, 2024, and must not have been previously used. The maximum deduction caps at $10,000 or the amount of interest paid, whichever is lower.
The phaseout for this deduction occurs at $100,000 in MAGI for individual filers and $200,000 for joint filers, making the threshold for qualification significantly tighter compared to the other deductions. This could limit the availability of the deduction for higher-income taxpayers.
### Enhanced Deduction for Seniors Reporting and Calculation
Seniors can benefit from an enhanced deduction of $6,000, valid until 2028, that applies regardless of whether they itemize deductions. The IRS stipulates that tax filers must report a valid Social Security number. The calculation of this deduction similarly relies on MAGI, with the phaseout rate set at 6% over $75,000 for individual filers. Thus, as one’s income increases, the total deduction will decrease until it reaches an income ceiling.
### Final Steps
Ultimately, taxpayers will compile their deductions and report the total on Form 1040. The deductions impact taxable income directly, contrasting with credits that affect the total tax owed more favorably.
The IRS cautions that these forms are in draft format and should not be filed as such. Adjustments may be made before the final release, and any feedback can be shared with the IRS through specified channels.
