For the first time, millions of tipped workers, overtime earners, and car-loan holders are claiming brand-new federal tax deductions this filing season, and the early results are showing up in refund checks. Through the week ending March 20, 2026, the average federal refund reached $3,571, according to IRS filing-season statistics. That is $3,571 minus last year’s $3,221, a difference of $350 that rounds to $340 in some summary figures. The jump lines up with three deductions introduced by the One Big Beautiful Bill Act (H.R. 1), signed into law on July 4, 2025.
The law created deductions for qualifying tip income, overtime pay, and auto loan interest. Filers claim them on a new Schedule 1-A attached to Form 1040. All three are above-the-line deductions, which means they reduce adjusted gross income whether a filer itemizes or takes the standard deduction. That distinction carries extra weight: a lower AGI can preserve eligibility for education credits, IRA contribution deductions, and other income-sensitive benefits.
How the three deductions actually work
Tips (up to $25,000). Workers who receive cash or charged tips reported on a W-2 can deduct up to $25,000 of that tip income per year. The deduction phases out for single filers with modified adjusted gross income above $160,000 and joint filers above $320,000. Self-employed workers who receive tips outside a traditional employer-payroll relationship do not qualify. The Treasury Department and IRS published the full eligibility rules in Notice 2025-69.
Overtime (up to $25,000). The same notice covers overtime pay. Filers can deduct overtime wages, also capped at $25,000, as long as the hours qualify under the Fair Labor Standards Act. In practice, that means hours beyond 40 in a single workweek for non-exempt employees. Salaried workers classified as FLSA-exempt are not eligible, even if they routinely log 50- or 60-hour weeks. The same income phase-outs apply.
Auto loan interest (up to $10,000). Filers who financed the purchase of a vehicle for personal use can deduct interest paid on that loan, up to $10,000 per year. The loan must be held by a qualifying lender. Leased vehicles do not qualify because a lease is not a purchase loan. The Treasury and IRS published proposed regulations requiring lenders to issue information returns so borrowers can document the interest they paid; the full proposed rule text is available through the Federal Register. Because those regulations remain in proposed form as of May 2026, the IRS is accepting claims under transition guidance that covers loans already in place before the law took effect.
What the refund numbers do and do not tell us
The $350 gap between the 2026 and 2025 mid-season averages (rounded to $340 in some headline summaries) is consistent with the scale of the new breaks. A quick illustration: a single filer in the 22% federal bracket who claims the full $25,000 tip or overtime deduction would save $5,500 in federal income tax. Most claimants will fall well short of the cap, but even a $5,000 deduction at the 12% bracket puts $600 back in a filer’s pocket.
The IRS’s annual filing-season index shows the 2026 season opened on January 26, one day earlier than the 2025 season, making the comparison windows nearly identical. The same filing-season data does not break out how many returns included a Schedule 1-A, so there is no public count yet of how many filers are actually using the new form. The IRS has historically released form-level breakdowns later in the year, so a clearer picture of Schedule 1-A adoption may not emerge until after the filing season closes.
Early-season averages also tend to skew higher because filers expecting refunds submit first. As later filers, who are more likely to owe, complete their returns through the April and October deadlines, the full-year average could settle lower than the mid-March snapshot.
Enrolled agents and CPAs who spoke about trends in their practices say tipped workers and hourly employees with regular overtime are the most common beneficiaries so far, while the auto loan interest deduction is drawing attention from commuters who previously had no vehicle-related federal write-off.
Who does not benefit
The new deductions have clear boundaries that leave out large groups of workers. Salaried employees exempt from FLSA overtime rules get nothing from the overtime provision, no matter how many extra hours they work. Gig workers and independent contractors who earn tips outside of a W-2 payroll arrangement cannot claim the tip deduction. Drivers who lease their vehicles rather than finance a purchase are shut out of the auto loan interest break. And any filer whose modified AGI exceeds the phase-out thresholds ($160,000 single, $320,000 joint) will see the tip and overtime deductions reduced or eliminated entirely.
There is also a state-level wrinkle. Federal above-the-line deductions automatically lower AGI on the federal return, but not every state conforms to the new provisions. Filers in states that have not adopted the One Big Beautiful Bill deductions may owe the same state tax they would have without the federal break. Checking with a state tax authority or a tax professional is the fastest way to know where a particular state stands.
These deductions are temporary
One detail that has gotten less attention: the tip and overtime deductions are not permanent. Under the text of the law, both provisions are set to expire after the 2028 tax year. The auto loan interest deduction carries a separate timeline and its own sunset provisions. Filers who are adjusting withholding or making financial plans around these breaks should keep the expiration dates in mind, because the tax savings could disappear after a few more filing seasons unless Congress acts to extend them.
Steps for filers who have not yet claimed the new deductions
Filers who earn tips, work overtime, or carry a car loan and have not yet submitted their 2025 return should review Schedule 1-A before filing. The form walks through each deduction and its specific requirements. Those who already filed without claiming an eligible deduction can submit an amended return on Form 1040-X; the IRS generally allows amendments within three years of the original filing deadline.
Most tax preparation software updated for the 2026 filing season will prompt qualifying filers automatically. But workers with overlapping pay structures, such as a restaurant employee who earns both tips and overtime, may want a second review with a tax professional to make sure every eligible dollar is captured. Given that these deductions are above the line, missing them does not just cost the deduction itself; it can also raise AGI enough to reduce or eliminate other credits and benefits downstream.
Paul Anderson is a finance writer and editor at The Financial Wire. He has spent seven years writing about investment strategies and the global economy for digital publications across the US and UK. His work focuses on making sense of economic policy, cost-of-living issues, and the stories that affect everyday Americans.
