Personal and business Tax

The Working Families Tax Cuts – What the New Deductions Mean for Your 2026 Return

The Working Families Tax Cuts, enacted through the One, Big, Beautiful Bill, introduced some of the most significant changes to individual taxation in recent years. For taxpayers filing in 2026 and 2027, these provisions create new deductions and modify existing ones in ways that require careful attention. The IRS has issued extensive guidance, including Fact Sheets and FAQs, to help taxpayers understand and claim these benefits .

This guide explains the core provisions of the Working Families Tax Cuts, who qualifies, and how to prepare your records for the upcoming filing season.

The New Deductions: Tips, Overtime, and Car Loan Interest

No Tax on Qualified Tips

Effective for tax years 2025 through 2028, employees and self-employed individuals may deduct qualified tips received in occupations that the IRS identifies as customarily and regularly receiving tips . The tips must be reported on Form W-2, Form 1099, or another specified statement, or reported directly by the individual on Form 4137.

The maximum annual deduction is **$25,000**. For self-employed individuals, the deduction cannot exceed net income from the trade or business where the tips were earned. The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for married couples filing jointly) .

No Tax on Qualified Overtime

Also effective for 2025 through 2028, individuals who receive qualified overtime compensation may deduct the portion of overtime pay that exceeds their regular rate of pay—for example, the “half” portion of “time-and-a-half” compensation required under the Fair Labor Standards Act . The maximum annual deduction is **$12,500** ($25,000 for married couples filing jointly). The deduction phases out at the same income thresholds as the tips deduction.

The IRS issued Fact Sheet 2026-01 in January 2026, providing answers to frequently asked questions about the overtime deduction, including eligibility for federal employees and where to find supplemental information .

No Tax on Car Loan Interest

Effective for 2025 through 2028, individuals may deduct interest paid on a loan used to purchase a qualified vehicle for personal use. The maximum annual deduction is **$10,000**, and the deduction phases out for taxpayers with modified adjusted gross income over $100,000 ($200,000 for joint filers) .

A qualified vehicle is a car, minivan, van, SUV, pickup truck, or motorcycle with a gross vehicle weight rating of less than 14,000 pounds that underwent final assembly in the United States. Taxpayers must include the Vehicle Identification Number (VIN) on their return for any year they claim the deduction.

The Enhanced Deduction for Seniors

Effective 2025 through 2028, individuals age 65 and older may claim an additional **$6,000 deduction** ($12,000 for a married couple if both spouses qualify). This is in addition to the standard deduction for seniors available under existing law . The deduction phases out for taxpayers with modified adjusted gross income over $75,000 ($150,000 for joint filers).

To qualify, you must be age 65 on or before the last day of the tax year. The deduction is available to both itemizing and non-itemizing taxpayers.

Standard Deduction Increases for 2026

The IRS released the 2026 inflation adjustments in Revenue Procedure 2025-32, incorporating amendments from the One, Big, Beautiful Bill . For tax year 2026 (returns filed in 2027), the standard deduction is:

  • $32,200 for married couples filing jointly

  • $16,100 for single taxpayers and married individuals filing separately

  • $24,150 for heads of households

These amounts represent an increase from the 2025 figures of $31,500, $15,750, and $23,625 respectively .

Recordkeeping and Documentation

The IRS emphasized in Fact Sheet 2026-05 that the new deductions do not change how taxpayers file their returns—they change what information must be included . Taxpayers should maintain:

  • Tip records: Form W-2 or 1099 showing reported tips, or Form 4137 if self-reporting

  • Overtime records: Documentation from employers showing qualified overtime compensation

  • Car loan documents: Loan agreement showing the VIN, origination date, and interest paid

  • Senior deduction: Proof of age and income documentation to confirm phase-out status

How Nova Tax & Accounting Services Can Help

Nova Tax & Accounting Services helps individuals and families navigate the new Working Families Tax Cuts provisions. Our CPAs can review your records, confirm eligibility for each deduction, and ensure your return is prepared accurately.

For more information, visit https://novataxservices.com/ or schedule a free consultation.

Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Tax laws are subject to change, and individual circumstances vary. Consult a qualified tax professional for advice regarding your specific situation.