Transcription
IRS Schedule One-A, additional deductions. This is a new tax form that was created by the Internal Revenue Service in light of the One Big Beautiful Bill Act passed in 2025. So, for those of you who are paying attention to the provisions of that law, there were a lot of things that were discussed, and most of the changes to lower individual tax bills happened to land on this form. So that it creates an adjustment to the Form 1040.
So, before we go into this form, we're going to break it down into the various parts and talk about the tax incentives that are covered in Schedule 1A. So, Part One is simply the calculation for, uh, the adjusted gross income for calculating the rest of your tax breaks.
Part Two is the no tax on tips. So that would be for people that are receiving tip income. So, if you are like most people, then you would complete this part so that you can report your tip income, but then also report the taxes that you're not paying, you know, calculate that you're not paying taxes on it. Of course, if you're a highly compensated person, I don't know, like an OnlyFans entertainer or you work at Peter Luger's Steakhouse in New York City, you might not be fully exempt on tip income, you know, if you're making half a million dollars, for example, in tips. But for the vast majority of taxpayers, you're going to complete the calculations in Part Two, and we'll walk through that, and it'll, it'll minimize your tax bill on tips.
Part Three, kind of the same thing, but for overtime pay. So, qualified overtime compensation. We'll talk about that in just a second.
Part Four, this is the part on paying taxes on car loan interest and how you would be able to back that out of your tax bill.
Part Five, if you're a senior citizen, you're probably highly interested in how this gets calculated. Gets calculated on Schedule 1A. So, this is the enhanced deduction on top of the standard deduction. So, even if you itemize deductions, which a lot of senior citizens might do with their charitable contributions and medical expenses and, you know, high state and local taxes, this is a deduction on top of anything else that you've itemized. So, you don't need to claim the standard deduction to be eligible for this additional deduction.
And then Part Six, we total everything up and then we put it on your Form 1040. Actually, I'll take a quick look at where the Form 1040 is and then we'll talk about, you know, how this looks different for this year's tax return. So, basically, um, we're going to take all of this information and we're going to put whatever the outcome is. There's an additional line 13B. This line did not exist last year. So, 13A is the qualified business income deduction, and then line 13B is the newly additional deductions that we just discussed. So that's where all of this goes on your Form 1040. Just so that you know, any deductions are up here above the tax calculation. So, this is going to reduce your income, but it's not a tax credit. So, that's a common question that I've received from lots of people is, you know, if I'm subject to one of these tax breaks, is it a tax credit or is it a tax deduction? It's a tax deduction. It lowers your taxable income. It does not give you a tax credit.
So, let's go into a little bit more depth on each of these. So, first, enter John Doe's information up here at the top. Let's just say that he has, uh, he and his family have $100,000 of income. That would be under the threshold, especially if he's married filing jointly, but he does have to add back certain items of income based on, you know, any sources that he might have excluded from Puerto Rico. So, let's say that we're just going to put in some numbers. Line 45 on Form 2555, that's the foreign income exclusion. Uh, and then there's also the foreign housing exclusion on line 50. So, both of those need to be added back in. Uh, IRS Form 4563, that's the amount that you would be able to exclude as, um, bonafide resident of American Samoa. So, all of these items get added back in. Let's just say that their new income is still $140,000. So, I just walked through this. There's no impact based on what we're going to be completing. There's no substantial impact. He's still going to be eligible for everything, but, uh, you know, you do need to add back those items of income before you move forward.
So, in Part Two, you only have, you can only complete it if you receive qualified tips, and the IRS actually has a page on their website where you can see what is a tipped occupation in the eyes of an of the IRS. And it looks like this. So, occupations that used to regularly receive tips, you know, for example, bartenders, food servers, on before December 31st, 2024. The IRS created this because, well, whenever tax incentives get rolled out, people try to take advantage. So, they did have to put a line in the sand and say, if this wasn't really a tip income type job before this law was passed, then we're not going to support it if there are, you know, new air quote jobs where tips are part of the income. So, that, that's kind of try an attempt to close a loophole.
So, qualified tips that you received as an employee, that's all of line four. So, 4A would be any qualified tips that were reported on your Form W-2. Line B would be qualified tips that were included on IRS Form 4137, which is what you would report to your employer. And then if you only received qualified tips as an employee with respect to one employer, you would pick one of those two. So, if you're so if you reported more tips than what your employer sent to you on your W-2 on IRS Form 4137, then it might look something like this. Let's see. $20,000 and maybe this was $30,000. Uh, you would enter the larger amount. If you received qualified tips that were larger or from more than one employer, then there are special instructions that you would need to follow to make sure that you keep track of all of that. Basically, you would take each employer, you would figure out the larger of these for each employer, and then you would add all of that, and then that total would go into line 4C. So, if you had a job at Applebee's and a job at Chili's, and your Applebee's job and your Chili's job both reported $20,000, but you actually reported back $30,000 for one and $30,000 for the other, you would be taking the larger amount, and this amount would be $60,000 from the two jobs. So, if you need help, there is a worksheet that helps you add that up, but it's not necessary, and it's only something that you would need to keep in your records.
Line five would be qualified tips that you received in the course of a trade or a business that were included on a Form 1099. So, not as an employee, but either as a non-employee, um, miscellaneous income, or this is what you would receive from a credit card processor, you know, something like PayPal. Uh, where they're, uh, recording transac, like sales transactions for you. So, if, if you received tips that were reported in any of these forms, you would enter that information here. So, let's just say you received $5,000 in tips there. We're going to add those two items up, and we get $35,000. We're going to enter the smaller of either this amount or $25,000. So, we can only go up to $25,000. Now, we're going to take the amount from line three, which is our modified adjusted gross income. Uh, married filing jointly, so $300,000. Uh, we would subtract line nine from line eight. If this is zero, then we're going to take this entire $25,000. We are able to exclude that from income. And that's going to play down into our total deduction.
So, the reason we have to do the income information here is because, let's imagine that we had a side hustle, but our total income was actually $450,000. And now we have to subtract that from the $300,000 ceiling. And now we're going to divide line 10 by a hundred a thousand dollars. So, that would be 150. Multiply line 11 by, uh, 100. So, that would be $15,000. And then we would subtract that from the $25,000. And now our tip income deduction is only $10,000. Right? So, that's kind of how you would have to play this if, uh, your income became an issue. But in this case, it's not. So, we're just going to go back to the way it was before.
Part Three, we're going to do a similar calculation. This time it's no tax on overtime. And so, you would only fill out Part Three if you receive qualified overtime compensation. Anyone who received over qualified overtime compensation must have a valid social security number. And if you're married, you have to file a joint tax return to claim the deduction. That same restriction also applies to the tip income. In fact, that's a recurring theme. You have to have a valid social security number, and you have to be filing a joint tax return. Uh, those are the two requirements. But very similar calculation, uh, qualified open overtime compensation. Uh, so, uh, qualified overtime compensation, uh, generally is subject to income tax, generally subject to social security and Medicare tax. And there were no changes for the 2025 W-2, 1099, or 1099 MISC forms. So, you might not see a separate accounting of what qualified overtime looks like versus, um, regular pay. So, you can calculate, uh, your qualified overtime compensation using one of the methods in, in the IRS instructions. There's five different, uh, methods, and we'll put together examples of how you can do these calculations in a separate video. But there are overtime compensation worksheets that you can use to calculate your qualified overtime.
Let's just say that as a W-2 employee, John Doe received $10,000 of qualified over overtime as an employee. And then he had a side hustle where he had an additional $5,000 of overtime. So, he's going to total that up. That's $15,000. Uh, we can include up to $15,000, uh, because we're allowed up to $25,000. We're going to put the amount from line three, which was 140. Then we're going to enter the $300,000. Again, no limitation here. Uh, so, if this is zero or less, then we're going to take the line 15 amount, put it down on the line 21. And if there is a number here, then you're, you're going to have to do the pro-rating calculation to see, uh, whether you're, you're going to be able to take a partial deduction or if your income is so high that you're completely phased out. So, that's Part Three, no tax on overtime.
Fill out Part Four only if you and your spouse are married filing jointly, and if you paid or if you accrued, uh, qualified passenger vehicle loan interest. And so, that's a mouthful that requires a little bit more of a deduction or a conversation. So, to qualify for the qualified passenger vehicle loan interest deduction, you have to meet the following criteria. First, you have to have a car loan that was originated after 2024. So, January 1st, 2025, or later. You have to have originated the loan. The proceeds from your loan were used to pay for a vehicle, like to buy a vehicle, not to lease a vehicle. Uh, your vehicle is for personal use, which means that you're not going to convert it to business use or commercial use. And your loan is secured by a first lien on the purchased vehicle. So, it has to be basically a primary lien. You can't take out like secondary loans or anything like that. So, your traditional car loan that you get that you got, um, for the car for personal use, that counts. Uh, as soon as you start trying to get funky with it and like, you know, figuring ways to, you know, squeeze in interest, you're probably going to find that they close that loophole pretty tightly.
So, as you can see, there are two columns. Uh, a vehicle could be used for Schedule C, which is for your business, Schedule E in support of, let's say, um, supplementary income. The most common would be real estate investing. Or then Schedule F, which would be farm income. So, you can either deduct it on one of those or you can deduct it on Schedule 1A. You can't double. You can't do both. So, if you paid $5,000 of interest on a vehicle, you can't claim $5,000 of interest on Schedule C and then turn around and claim $5,000 on Schedule 1A. They have to add up to $5,000. You might have some flexibility on how you do that, but generally not. So, let's just put in a fake VIN number. And let's just not mess with that. We're going to say that we paid $5,000 of interest here. And then if you had a second car, you would put the second car's information. For simplicity's sake, we're just going to keep going through. And we're going to enter the smaller of this amount or $10,000. That's the maximum. And then we're going to do the same AGI calculation that we did here. Except, um, if this was a single taxpayer, there would be a partial phase-out. Uh, since we're married filing jointly, they're going to be eligible for the complete, uh, deduction. We don't have to do this, you know, phase-out calculation down here. And we're going to get that they're eligible for the full $5,000.
Enhanced deduction for seniors. This is pretty straightforward. You're simply going to take the $140,000 or whatever the line three amount is up there. Uh, their income is $150,000 or under $150,000. So, we'll enter zero here. So, now we're going to, um, So, if it's zero or less, you would enter $6,000 on line 35. So, now in lines 36A and 36B, it's going to ask you about your valid social security number. So, um, now if you had to do the pro-rating calculation, uh, then you may find that you're less, you're eligible for a deduction of less than $6,000. So, let's say that, let's just say that your income was $160,000. So, now, so now we would multiply that by 6%. That's $600. We would subtract this, this amount from the $6,000 up there. And that would be the new allowed enhanced deduction for seniors for someone that's making $160,000. So, that's just kind of for example. We don't have to worry about that. So, we're just going to keep going.
>> [sighs]
>> Now, if you have a valid social security number, this number is just going to carry down. And then if you're filing a joint return and your spouse has a valid social security number, and your spouse was before born before January 2nd, 19 or 1961, you'll enter the same amount twice. And then you're going to add the total of those, and you, that's the maximum $12,000 annual deduction for seniors. And now you can add the total of these. So, we're going to take the, sorry, that was not the qualified tips deduction. That is a qualified tips deduction. So, $25,000, $15,000 here, so that's 40,000. We've got another $5,000, so 45, and then another $12, so that's $57,000. So, this could be a pretty substantial chunk of money that people are deducting from their taxable income. And again, you would go to your Form 1040, and you would put that figure right here.
So, that's pretty much all we have for the new Schedule 1A. It's pretty straightforward, and kind of captures much of the significant changes that are impacting most taxpayers from the One Big Beautiful Bill Act. So, this tax season, as we get a little bit further into it, and as more people become familiar with Schedule 1A, we will be fielding questions and rolling out additional videos on some of the terminology and calculations. So, please stay tuned. We will put links in the show notes to resources that we've created about articles and forms or articles and videos about forms and schedules that we've mentioned here in this video. So, if you like our articles, please subscribe to our newsletter. If you like our YouTube videos, please subscribe to our YouTube channel. And as always, if you have any questions, comments, or if there are any other topics that you'd like to see discussed in an upcoming video, please hit me up in the comments section. Thank you very much, and have a great day.