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Big Beautiful Bill, Part 2: New Below The Line Deductions

August 18th, 2025 by Blake Pinyan

OBBBA has numerous changes and noteworthy inclusions that we’ll continue to highlight in a series of articles. This second article will focus on the new below-the-line deductions created as part of the tax legislation package, along with associated planning opportunities and key considerations.

In Part 2 of our OBBBA series, we’ll cover:

  • Above-the-Line vs. Below-the-Line Deductions
  • Charitable Contribution Deduction for Standard Deduction Taxpayers
  • The Tips Deduction
  • The Overtime Deduction
  • The Auto Loan Interest Deduction

Above-the-Line vs. Below-the-Line

 

Before diving into OBBBA’s new deductions, it’s helpful to distinguish between above-the-line and below-the-line deductions.

Above-the-Line (everything you can deduct before AGI)

An above-the-line deduction reduces a taxpayer’s adjusted gross income (AGI) – these are subtracted from your income before your AGI is calculated for tax purposes. The “line” we’re referring to is AGI itself.  Every dollar that reduces your AGI reduces your taxable income. Both Adjusted Gross Income and Modified Adjusted Gross Income (MAGI) are key figures on a tax return, as many tax provisions reference them.

MAGI is AGI with certain items added back, such as deductible IRA contributions, student loan interest, and tax-exempt interest. Examples of tax provisions based on AGI or MAGI include:

  • Taxation of Social Security benefits
  • Ability to contribute to a Roth IRA
  • Medicare Part B and D premiums
  • Various tax credits and phaseouts

Examples of above-the-line deductions:

  • Health Savings Account contributions
  • Capital losses
  • Student loan interest
  • Educator expenses
  • Traditional IRA contributions

Below-the-Line (everything you can deduct after AGI)

A below-the-line deduction does not affect AGI or MAGI; instead, it reduces taxable income.  These are commonly referred to as itemized deductions.  Taxable income determines your:

  • Marginal tax rate (the rate on your next dollar of income)
  • Federal long-term capital gain rate (0%, 15%, or 20%)
  • Qualified Business Income (QBI) deduction eligibility

Examples of current below-the-line deductions (prior to OBBBA) include:

  • Standard deduction
  • Combined itemized deductions (mortgage interest, state and local taxes, charitable contributions, medical expenses above 7.5% of income, certain miscellaneous itemized deductions, etc.)
  • QBI deduction

Example

Your Gross Income                        $100,000

–  Above-the-Line Deductions      $10,000 (i.e. IRA Contributions and Capital Losses)

=  AGI                                           $90,000 ($100,000-$10,000)   

–  Itemized Deductions                    $20,000 (i.e. Mortgage Interest, Property Taxes)

=  Taxable Income                             $70,000 ($90,000-$20,000)

All of OBBBA’s new deductions are below-the-line, meaning they do not affect AGI but do reduce taxable income.

Charitable Contribution Deduction for Standard Deduction Taxpayers

 

OBBBA introduces two changes to the charitable contribution deduction (effective in 2026):

  1. Charitable deduction for non-itemizers (those taking the standard deduction)
  2. AGI floor for itemizers

We covered the AGI floor for itemizers in our last article. Here, we’ll focus on the deduction for standard deduction taxpayers.

Background

The CARES Act of 2020 temporarily allowed taxpayers taking the standard deduction to claim up to $300 (single) or $600 (joint) in charitable contributions. This benefit expired after 2021.

What’s New

Beginning in 2026, the deduction is restored and increased to:

  • $1,000 for single filers
  • $2,000 for joint filers

This deduction is not subject to an AGI floor, meaning contributions are deductible up to the flat maximum without needing to exceed a percentage of income.

Key Points

  • Only cash contributions (cash, check, credit card) qualify. Donations of property, household items, clothing, etc., do not.
  • Contributions to Donor Advised Funds (DAFs) or Section 509(a)(3) supporting organizations are excluded.
  • Donations can be made to public or private charities.
  • Applies only to taxpayers taking the standard deduction.

Planning Opportunity

From a planning standpoint, taxpayers who are projected to take the standard deduction in 2026 and are charitably inclined could consider maximizing cash contributions—$1,000 for single filers and $2,000 for joint filers. Doing so can help reduce taxable income while also supporting philanthropic goals.

Qualified Tips Deduction

 

OBBBA creates a new below-the-line deduction of up to $25,000 for qualified tip income, effective 2025–2028. This reduces income tax but does not eliminate FICA taxes (Social Security and Medicare).

Qualified Tip Requirements

  • Qualified Occupation: The IRS will publish a list of eligible occupations by October 2, 2025. These will be jobs that traditionally received tips before 2025.
  • Voluntary Tips Only: Automatically added tips (e.g., for large restaurant parties) do not qualify.
  • No SSTBs: Tips from specified service trades/businesses (e.g., accountants, lawyers, consultants, entertainers, musicians, artists) are excluded.

Income Limits

  • Phaseout starts at $150,000 MAGI (single/HOH) or $300,000 (joint). Deduction is reduced by $100 for every $1,000 over these thresholds.
  • Business owners in qualified occupations may be eligible, but the deduction is capped at business profit.

Planning Opportunity

Those who customarily receive tips as part of their occupation should be mindful of the income phaseouts. If they are near the threshold, they may want to explore strategies to reduce MAGI—such as contributing to employer-sponsored retirement accounts, funding an HSA (if eligible), or capturing capital losses in a brokerage account. On the other hand, business owners close to $25,000 of profit (excluding the tips deduction) might consider deferring expenses or accelerating income, where feasible, to fully maximize the available deduction.

Available to both standard deduction and itemizing taxpayers.

Qualified Overtime Deduction

 

This deduction applies to qualified overtime wages and is effective 2025–2028. Like the tips deduction, it reduces income tax but not Social Security or Medicare taxes.

Deduction Amount

  • Up to $12,500 for single/HOH
  • Up to $25,000 for joint filers

Qualified Overtime Requirements

  • Overtime must be required by law.
  • Only the excess pay rate above regular wages is deductible.
    • Example: $25/hour regular rate, $35/hour overtime → $10/hour excess is deductible.

Income Limits

Same thresholds and phaseouts as the tips deduction: $150,000 MAGI for single/HOH and $300,000 for joint filers, with a deduction phaseout of $100 for every $1,000 over those limits. 

Planning Opportunity

Taxpayers eligible for overtime compensation may want to consider taking on extra shifts or hours, given the combined benefit of higher pay and this new tax deduction. As with the tips deduction, it’s important to be aware of the income phaseouts—if you are near the threshold, you may want to explore strategies to reduce MAGI, such as contributing to retirement accounts or an HSA (if eligible), to preserve the full deduction based on your filing status.

Available to both standard deduction and itemizing taxpayers.

Auto Loan Interest Deduction

 

A significant new below-the-line deduction allows up to $10,000/year in qualified auto loan interest, effective 2025–2028.

Qualified Requirements

  • Newly Purchased for Personal Use: Only newly purchased (not leased) vehicles are eligible. Used cars and leases do not qualify. Purchase must be for personal (not business or resale) use.
  • Loan Timing: Loan must be taken after 12/31/2024. Vehicle must be secured by a first lien. Refinancing is allowed if loan amount is not greater than the original balance.
  • Qualified Passenger Vehicles:
    • Manufactured for use on public roads
    • Cars, minivans, SUVs, pickup trucks, or motorcycles (no RVs, ATVs, trailers)
    • Final assembly in the U.S. (check via VIN)
    • Gross vehicle weight under 14,000 lbs.

Income Limits

  • Phaseout starts at $100,000 MAGI (single/HOH) or $200,000 (joint). Reduced by $200 for every $1,000 over. Fully phased out above $149,000 single or $249,000 joint. 

Planning Opportunity

Those considering acquiring a vehicle in the next few years should evaluate whether the new vehicle they have in mind meets the Qualified Passenger Vehicle requirements for this tax deduction.

If deciding between a new and used vehicle—and the price difference is not substantial—it may be worth comparing the cost of the new car minus the potential tax savings from 2025–2028 to see if it is more cost-effective than the used option.

Because this deduction is temporary, purchasing a qualifying vehicle in 2025 rather than waiting may provide more value, as you could capture the deduction for all four eligible years instead of fewer in later years.

Refinancing a loan during this period could also be worth considering if it both qualifies for the deduction and secures a lower interest rate.

Finally, similar to the tips and overtime deductions, it’s crucial to be mindful of the income phaseouts. If you are near the threshold, consider strategies to lower MAGI—such as contributing to retirement accounts or funding an HSA (if eligible)—to preserve the full $10,000 deduction.

Available to both standard deduction and itemizing taxpayers.

In Summary

 

OBBA introduces several new below-the-line deductions, each with unique requirements and planning implications. These changes present opportunities to reduce taxable income, but each deduction comes with eligibility rules and income limits.

At Anchor Bay, we focus on educating our clients and providing proactive tax planning so they are prepared for how new legislation affects their personal financial picture. With taxes, it’s not what you make—it’s what you keep that counts.