Overtime, Tips and Car Loan Interest-Deep Dive

At Toran, we’re breaking these updates down piece by piece to help you apply them with strategy — not guesswork. Below, we’re spotlighting three tax breaks that you’ll want to start planning for in 2025 and beyond:

• No tax on qualified overtime compensation with a cap and AGI phaseouts
• No tax on tips, with a cap and AGI phaseouts
• Deductibility of auto loan interest on qualifying passenger vehicles

We’ll continue digging into other planning opportunities in future updates, but here’s your first deep dive.

1. No Tax on Overtime: A Win for Employees and Strategic Employers

One of the most exciting provisions in the new bill allows for the exclusion of certain overtime pay from federal income taxes, up to a cap of $25,000 ($12,500 for single filers). This isn’t just a tax credit — it’s a complete exclusion from income. That means qualified employees simply won’t owe tax on eligible overtime earnings.

What qualifies?

The overtime must be considered qualified OT compensation under the Fair Labor Standards Act (FLSA). That means it must represent the 0.5x “premium” portion of time-and-a-half, not regular time or bonus pay. If your employees are hourly, non-exempt workers who log extra hours under FLSA rules, it likely applies.

Planning tip: If your teams regularly rack up OT hours, this could represent a meaningful tax break for them. More importantly, it gives you a powerful retention and incentive tool without increasing your wage base.

Be aware of income thresholds. This exclusion phases out as income climbs:

• Begins to phase out at $150,000 (single) or $300,000 (married filing jointly)
• Reduced by $100 for every $1,000 over that limit

This provision is currently set to expire in 2028, so the next few years are critical for optimization. We’re already modeling how this impacts take-home pay and advising employers on how to structure OT programs around it.

2. No Tax on Tips: A New “Above-the-Line” Deduction with Business Potential

The bill also introduces a first-of-its-kind deduction for tip income — specifically, cash or credit card tips that meet certain qualifications. While this might sound like it’s just for restaurants, there are broader implications for many service industries that receive direct customer gratuities.

Unlike a traditional exclusion, this is treated as an “above-the-line” deduction. That means:

• It reduces adjusted gross income (AGI)
• It’s available whether or not you itemize
• It’s capped at $25,000 per taxpayer

Who qualifies?

To claim this deduction, the tips must be:

• Voluntary (not mandatory service charges or auto-gratuities)
• Properly reported (appearing on a W-2, 1099-K, 1099-NEC, or Form 4137)
• From non-Specified Service Trades or Businesses (SSTBs) — meaning businesses like accounting, law, and financial services do not qualify

At its current state, the bill does specifically define that the deduction is for employees of “an occupation which customarily and regularly receives tips,” however it goes on to say that the secretary will be releasing a list of defined occupations. Right now, only food and beverage and beauty business are defined in the bill and get the deduction, but a list will be released in 90 days that defines “occupations which customarily and regularly receive tips.”

If your employees or you are being tipped directly, they may now get a major tax benefit.

AGI limits matter here too:
This deduction begins phasing out at:

• $150,000 for single filers
• $300,000 for joint filers

And it is reduced by $100 for every $1,000 in excess income.

What about businesses?
There may also be an opportunity here for businesses to report and track tips more systematically and incorporate this into payroll practices or employee education. If you operate a service-based business where tips are common, this deduction could be a game-changer in employee retention.

3. No Tax on Auto Loan Interest: New Rules for “Qualified Passenger Vehicles”

Starting in 2025, individual taxpayers will be able to deduct auto loan interest for personal-use vehicles — a break that hasn’t been available in years.

This provision applies as an above-the-line deduction, meaning you don’t have to itemize to benefit. And like the other two, it comes with important caveats.

Who qualifies?

To deduct the interest, the loan must be for a Qualified Passenger Vehicle, which means:

• Original use starts with the taxpayer (i.e., new cars with final assembly in the United States)
• Manufactured for use on public roads
• Not used for fleet, commercial, or lease purposes
• Not a salvage title vehicle
• Identified with a valid VIN

The deduction limit is $10,000 total, and only interest actually paid or accrued during the year qualifies.

What’s excluded?

• Used Vehicles
• Fleet vehicle loans
• Leases
• Loans for commercial-use vehicles
• Loans with salvage titles

AGI phaseout again applies:

• Begins at $100,000 for single filers and $200,000 for joint
• Deduction is reduced by $200 for every $1,000 over the limit

If you're a business owner who purchases vehicles for mixed use or as a perk for employees, you’ll need to navigate this carefully — we can help determine whether this applies based on ownership structure and intended use.

Next Steps: Plan Ahead for 2025 and Beyond

We’ll continue breaking down specific provisions from the Big Beautiful Bill in future newsletters — including expanded child tax credits, retirement incentives, and changes to bonus depreciation and Section 179.