New Tax Breaks Delayed Until 2026: What Workers and Small Business Owners Need to Know
When Congress passed new tax law changes in 2025, many taxpayers were excited about the potential savings. Among the most talked-about were new deductions for overtime pay, tip income, and car loan interest.
But there’s a catch: the IRS has officially delayed implementation until 2026.
That means you cannot claim these new deductions on your upcoming 2025 tax return (filed in 2026). Instead, they will apply to income earned in 2026 and later, reported on returns filed in 2027.
What Were the Promised Tax Breaks?
The tax law was designed to provide relief for middle-class workers and small business owners. Here’s a quick look at what taxpayers expected:
- Overtime Deduction – Allowing employees who work extra hours to deduct a portion of their overtime income.
- Tip Income Deduction – Designed to benefit service workers (restaurant staff, salon workers, rideshare drivers) who rely heavily on tips.
- Car Loan Interest Deduction – A new provision allowing certain workers and self-employed individuals to deduct part of the interest paid on car loans, if used for work.
These would have been first-time deductions in many cases, giving taxpayers more ways to reduce taxable income.
Why the Delay?
The IRS explained that it needs more time to:
- Update reporting systems and software.
- Adjust payroll and tip reporting processes.
- Provide clear guidance for employers, workers, and tax professionals.
In short, the IRS isn’t ready to handle these new deductions just yet.
Example: Overtime Deduction
Let’s say you’re a nurse in Los Angeles who regularly works overtime. In 2025, you earn an extra $12,000 in overtime pay.
- What you expected: Under the new rules, you could have deducted part of that overtime income, lowering your taxable income by several thousand dollars.
- What happens now: Since the IRS delay pushes the rule to 2026, you won’t be able to deduct this overtime on your 2025 tax return. Your full $12,000 still counts as taxable income.
This doesn’t mean the deduction is gone—it just means you’ll need to wait until you file your 2026 return in 2027.
Example: Tips Deduction
Imagine you’re a bartender who earns $20,000 in wages and $15,000 in tips in 2025.
- Expected: The new tax law promised a partial deduction on tip income, recognizing that tipped workers face unique tax burdens.
- Reality: For 2025, you must still report and pay tax on the full $35,000. The tip deduction will not apply until the 2026 tax year.
Example: Car Loan Interest Deduction
Suppose you’re a rideshare driver who pays $5,000 in car loan interest during 2025.
- Expected: You thought you could deduct a portion of that interest as a business expense, even beyond the standard mileage allowance.
- Reality: This deduction is postponed until 2026, so for now, you can still deduct mileage or actual car expenses, but not loan interest as a separate item.
What You Can Do in 2025
Even though the new deductions are delayed, you still have plenty of opportunities to lower your tax bill:
- Use Existing Deductions – Mileage, home office, retirement contributions, medical expenses, and equipment purchases can still provide significant tax savings.
- Track Everything – Especially if you earn tips or drive for work. Good recordkeeping now will make it easier to claim deductions when the new rules finally apply.
- Plan Ahead – If you expect high overtime, tip income, or vehicle expenses in 2026, consider timing purchases or work strategies to maximize those deductions when they become available.
- Work With a CPA – Tax laws are shifting quickly. A proactive CPA can help you take advantage of today’s deductions while preparing for tomorrow’s changes.
Bottom Line
The new tax law offers exciting deductions for overtime, tips, and car loan interest, but the IRS has delayed them until 2026.
That means for now, stick with the current rules. Focus on maximizing today’s deductions while preparing for the changes ahead. With good planning, you’ll be ready to claim these benefits once they officially kick in.
Need Help Planning Ahead?
At Velin & Associates, Inc., we specialize in helping workers, creators, and small business owners in Los Angeles navigate complex tax changes. Whether you’re a nurse working overtime, a bartender earning tips, or a rideshare driver managing vehicle costs—we can help you strategize for 2025 while preparing for 2026 and beyond.
Velin & Associates, Inc
8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.