The IRS has released new guidelines to help taxpayers understand the Big Beautiful Bill, a sweeping tax reform law now in effect for the 2025 filing season. Aimed at middle-class workers, boomers and retirees, the bill introduces major changes — including new deductions for seniors and the elimination of federal income tax on tips, car loan interest and overtime pay.
If you’re confused about what the Big Beautiful Bill means for you, we breakdown the new guidance below.
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Bigger Deductions for Seniors
The IRS confirms a new $6,000 deduction for taxpayers aged 65 and older, in addition to the standard deduction. This provision is designed to reduce taxable income for retirees, helping them keep more of their retirement benefits.
“The new $6,000 senior deduction is a huge win for retirees,” said Hector Castaneda, certified public accountant (CPA) and principal at Castaneda CPA & Associates. “Having this extra deduction helps lower their taxable income. This means that more of their Social Security checks and retirement benefits stay in their hands instead of being taxed.”
However, according to financial advisor Linda Jensen, the deduction does not eliminate taxes on Social Security income entirely. It simply reduces taxable income, which may lower overall liability for eligible retirees.
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No Taxes on Tips and Overtime
The new law eliminates federal income tax on tips and overtime pay, but not in the way many taxpayers might assume. According to IRS guidance, these are deductions rather than exclusions, meaning the benefit depends on the taxpayer’s income bracket.
TurboTax spokesperson and CPA Lisa Greene-Lewis said that the deductions are not a dollar-for-dollar reduction of taxes owed. “For example, if you made $10,000 in tips and were in the 12% bracket, your savings would be $1,200,” she said.
The tip deduction is capped at $25,000 annually and begins to phase out for incomes above $150,000. It applies whether taxpayers itemize or take the standard deduction, offering potential relief for workers in service industries such as restaurants, salons and coffee shops.
However, Castaneda said the deduction does not exempt tips or overtime from Social Security and Medicare taxes, which still apply at a combined rate of 15.3%.
Car Loan Interest Is Now Deductible
The IRS confirmed that interest on qualifying car loans is now deductible for vehicles purchased after 2024. The deduction applies only to new, U.S.-assembled vehicles used for personal purposes and is available through 2028.
Jensen said taxpayers can deduct up to $10,000 per year in auto loan interest on eligible vehicles. The benefit begins to phase out for single filers with modified adjusted gross income above $100,000 or $200,000 for married couples filing jointly.
For many taxpayers, especially retirees or caregivers financing a reliable vehicle, this deduction could lower their taxable income and reduce their overall tax burden.
However, Castaneda said the deduction is expected to have limited impact for most taxpayers, as it applies only to new U.S.-assembled vehicles and may not outweigh the standard deduction.
How To Prepare Now
The IRS recommended that taxpayers review their income and deductions before the year ends. Smart planning now could make 2025 tax returns faster, easier and more favorable.
Those expecting to claim the new tip or overtime deduction should monitor their income to stay within eligibility limits. Retirees may benefit from tracking medical or caregiving expenses in case additional deductions apply. Reviewing modified adjusted gross income ahead of time may also help avoid phase-outs and maximize potential savings.
“MAGI matters: All these new deductions rely on Modified Adjusted Gross Income, which closely mirrors AGI (adjusted gross income) but may differ depending on exclusions or additions like foreign income,” Jensen explained.
“These deductions are above-the-line, meaning they reduce taxable income even if taxpayers don’t itemize, though they don’t reduce AGI, which can affect phase-outs for other credits and surcharges,” she added.
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This article originally appeared on GOBankingRates.com: What the Big Beautiful Bill Means for You: New IRS Guidelines Break It Down
