The law signed on July 4, 2025 created four new federal deductions. Each one is effective for 2025 through 2028. Here is a plain-language summary of what changed — and an important California catch at the end.

Tips

Employees and self-employed people in occupations the IRS lists as customarily receiving tips may deduct qualified tips, up to $25,000 per year. The deduction phases out above $150,000 of modified adjusted gross income ($300,000 for joint filers).

Overtime

Workers may deduct the part of overtime pay above their regular rate — such as the "half" in "time and a half" — when that overtime is required by the Fair Labor Standards Act. The maximum is $12,500 per year ($25,000 for joint filers).

One important note for California workers: because the deduction applies only to federally required overtime, daily overtime paid under California law does not qualify for the federal deduction.

Car Loan Interest

You may deduct up to $10,000 per year of interest on a loan taken out after December 31, 2024, to buy a new vehicle for personal use. The vehicle must have final assembly in the United States, and used vehicles and leases do not qualify. You must include the vehicle's VIN on your return.

Seniors

People age 65 and older may claim an extra $6,000 deduction per person, or $12,000 for a married couple when both qualify. It phases out above $75,000 of modified adjusted gross income ($150,000 for joint filers).

How to Claim These Deductions

All four deductions are available whether you itemize or take the standard deduction, but married taxpayers must file jointly to claim them. They are claimed on the new Schedule 1-A.

The California Catch

California does not automatically follow federal tax law changes. The state's most recent conformity bill, SB 711, does not include federal laws enacted after January 1, 2025 — including the One Big Beautiful Bill Act. This means tips and overtime generally remain fully taxable on your California return, even if they are deducted on your federal return.

Keep an eye out for any future California legislation that could change this. We will post an update here if the state conforms.

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Sources: IRS Fact Sheet FS-2025-03 and IRS Schedule 1-A release — irs.gov/newsroom; FTB Tax News, November 2025 — ftb.ca.gov

This article is for general information only and is not tax advice. Contact Bay Tax Services at (408) 378-9303 to discuss your situation.