Schedule 1-A, Part by Part: Four New Deductions and the Phaseouts That Eat Them

Four new deductions, one new form. Schedule 1-A (Form 1040), Additional Deductions, is where the tips, overtime, car loan interest and enhanced senior deductions all come together — and where a single number, your modified AGI, decides how much of each one survives.

The form is short. The interactions are not.

Part I: modified AGI, which drives everything

Every phaseout on this form keys off the MAGI computed in Part I. For most filers it is simply AGI. The additions are narrow — excluded foreign earned income, the foreign housing deduction, and Puerto Rico or American Samoa income.

The important thing about Part I is structural: one income figure controls four separate phaseouts running at three different rates. That is why a change in income has an outsized effect on this form compared to any single deduction you are used to.

Part II: qualified tips — $25,000

Capped at $25,000 per return. Not doubled on a joint return, which surprises two-earner tipped households every time.

Phases out by $100 for each $1,000 of MAGI over $150,000 ($300,000 joint), reaching zero at $400,000 ($550,000 joint).

Requirements that are easy to miss: the tips must be voluntary (mandatory service charges are wages), the occupation must be on Treasury's closed list of tipped occupations, and you need a Social Security number valid for work issued by the return due date. An ITIN does not qualify. If you are married, you must file jointly.

Your substantiation is Box 12 code TP on the 2026 W-2, with the occupation code in Box 14b — or the corresponding boxes on a 2026 Form 1099-NEC if you are a contractor.

Part III: qualified overtime — $12,500 / $25,000

Capped at $12,500 single, $25,000 married filing jointly. Same $100-per-$1,000 phaseout over the same $150,000 / $300,000 thresholds.

The definitional trap here is bigger than the arithmetic one. Qualified overtime is only the FLSA-required premium — the extra half in time-and-a-half — not the whole overtime paycheck. A client who tells you they earned $30,000 of overtime has probably earned about $10,000 of qualified overtime.

Substantiation is Box 12 code TT.

Part IV: car loan interest — $10,000

Capped at $10,000, and this is where the phaseout gets steep: $200 for each $1,000 of MAGI over $100,000 ($200,000 joint) — twice the rate that applies to tips and overtime, over a threshold that starts $50,000 earlier. It is gone by $150,000 ($250,000 joint).

The eligibility conditions are the most restrictive on the form. The vehicle must be new (used vehicles do not qualify), assembled in the United States, under 14,000 lbs GVWR, for personal use, and secured by a first lien on a loan taken out after December 31, 2024. Part IV also asks for the VIN.

Your substantiation is Form 1098-VLI, the Vehicle Loan Interest Statement. 2026 is the first year lenders actually file it with the IRS — for 2025 they only had to make the total available to you, which is why last year's version may have arrived as an ad-hoc letter.

Part V: the enhanced senior deduction — $6,000 per person

$6,000 per qualifying individual age 65 or older, so $12,000 on a joint return where both spouses qualify.

The phaseout here works differently from the other three: a straight 6% of the excess over $75,000 ($150,000 joint), applied per qualifying person, with no rounding. One person's $6,000 is gone at $175,000. Two people's $12,000 is gone at $250,000 joint.

It sits on top of the standard deduction and the existing additional deduction for age, and it is available whether you itemize or not.

Three things that are true of all four

They are not automatic. Your software knows your age, but Part V still has to be completed. Nothing on this form claims itself.

Married filing separately is out for tips, overtime and the senior deduction — all three require a joint return.

The steps do not all round the same way. Each part divides the excess MAGI by $1,000 before multiplying, but the rounding differs. Tips (line 11) and overtime (line 19) decrease the result to the next lower whole number, so a partial thousand costs nothing and the first $999 over the threshold is free. Car loan interest (line 28) increases it to the next higher whole number, so one dollar over $100,000 costs a full $200 step. The statute is the reason: the car loan provision reduces the deduction for each $1,000 "or portion thereof," language the tips and overtime provisions do not contain.

Where planning actually lives

Stack the phaseouts and something useful appears. A household inside the tips, overtime and car loan phaseouts loses $400 of deduction per $1,000 of additional MAGI. At a 22% marginal rate that is an extra 8.8 percentage points of effective tax on income that looks ordinary.

Which means, for exactly these clients, a pre-tax retirement contribution or an HSA contribution is worth substantially more than the headline bracket implies — and a deferred December bonus can pay for itself twice.

Our free Schedule 1-A estimator stacks all four parts, shows what each phaseout removes, and reports what the next $1,000 of income costs across the whole form.

General information, not tax advice. Confirm figures against the current Schedule 1-A instructions and your client's specific facts.