Navigating the New Tax Landscape: Key Provisions on Senior Deduction, Car Loan Interest Deduction, Trump Accounts for Children and Payroll Deductions

The “Reconciliation Bill H.R. 1” introduces numerous new tax provisions designed to benefit working families, retirees, and young savers. This article highlights four new tax changes that present planning opportunities for individuals: the Senior Deduction, Car Loan Interest Deduction, Trump Accounts for Children, and Payroll and Fringe Benefit Changes.

Here is what taxpayers should know and how they can strategically plan to benefit.

The Senior Deduction

Individuals aged 65 or over can claim an additional standard deduction of $6,000 ($12,000 for married filing jointly) regardless of whether they plan to itemize or use the standard deduction. It is effective from 2025 through 2028 only for seniors with social security numbers and phases out at 6% of MAGI above $ 75,000 for single filers ($150,000 for joint filers). Consider maximizing pretax contributions like 401k, IRA, HSA to stay under the phase out thresholds and stack the senior deduction with medical expense and mortgage interest deduction if itemizing. There is also an opportunity to leverage additional senior deduction to convert traditional IRAs to Roth IRA and have the income grow tax free.

Car Loan Interest Deduction

This new deduction offers taxpayers a valuable and limited time opportunity to lower their taxable income — something that has not been available for decades in personal vehicle financing. Starting in 2025, taxpayers purchasing new personal use cars using a financing arrangement originating after December 31, 2024 can deduct up to $10,000 in interest paid on their car loan. Since this deduction is an above-the-line deduction, it also helps to monitor and manage AGI that in turn determines the eligibility for various tax deductions and credits for individual filers. Consider high early interest loans or short-term financing to maximize the deductible car loan interest. Timing your personal use vehicle purchases early in the year 2025 is the key to deducting high interest payments. There are some additional eligibility requirements such as the assembly of the vehicle, which must be in the U.S.; the original use of the vehicle, which must begin with taxpayer; and VINs that must be reported on the taxpayer’s tax return. This deduction is for vehicles that have 2+ wheels and weigh within 14,000 lbs. The deduction starts to reduce by $200 per $1,000 once the MAGI exceeds $100,000 for single filers ($200,000 for married filing joint) and fully phases out at MAGI of $150,000 for single filers ($250,000 for married filing joint).

Tips and Overtime Deductions and Expanded Family Leave Credit

It provides powerful tax-saving tools for both employees and employers. These changes create new deductions, credits, and exclusions that can reduce taxable income, improve cash flow, and encourage family-friendly workplace policies. Effective during 2025-2028, in addition to the standard deduction, employees and independent contractors can now deduct $25,000 in reported tips annually. Tips must be paid voluntarily and determined by the payor and cannot be negotiated. The phase out begins at $150,000 MAGI for single filers ($300,000 for joint filers) and is relevant only in tip receiving occupations like hospitals, restaurants, and retail industries. The new deduction not only encourages workers to report their tips accurately but also offers several prospects to prefer more tipped hours vs base pay, lowering the wage cost for employers.

Further, employees/independent contractors can now take a deduction of up to $12,500 ($25,000 if both spouses work overtime) for qualified overtime compensation that must be reported on Box 19 of Form W-2 (equivalent reporting on 1099 for non-employees required). This deduction is set to sunset after 2028 and starts to reduce by $ 100 for every $1,000 once the MAGI is over $150,000 for single filers ($300,000 for married filing joint) and fully phases out at MAGI of $400,000 for single filers ($ 550,000 for married filing joint). No itemizing is required and the deduction is in addition to standard deduction, however, is subject to occupation eligibility.

With the permanence of FMLA tax credits beyond 2025, employers can choose to benefit from credits being the greater percentage of wages paid to employees on leave or a percentage of insurance premiums paid for a leave plan even if leave is not being availed. No deduction is allowed for wages/premiums used in calculating the FMLA credits. Employees now qualify for FMLA after just six months of service, which was 12 months earlier. Part-time workers qualify if they work 20 + hours per week.

Trump Accounts for Children

These accounts are a new tax-deferred savings vehicle for parents trying to save for their child’s education or plan for their financial security. For children born during 2025-2028, the federal government will seed each account with $1,000. Parents, grandparents, legal guardians, relatives, employers, or nonprofits can make an annual non-deductible contribution capped at $5,000 per child. The investment of funds from the Trump account is restricted to low-cost U.S. equity index funds, such as the S&P 500 with fees capped at 0.10%. Withdrawals are prohibited until the child turns 18. After age 18, the account is treated like a traditional IRA with typical penalties for non-qualified use and early withdrawal. Funds withdrawn for qualifying expenses (education, home purchase, job training) are tax-free. In other words, the contributions and investment earnings grow tax-deferred, but withdrawals for non-qualified expenses and before the age of 59½ are typically subject to 10% early withdrawal penalty, in addition to regular income tax. Although the law currently does not allow direct conversion to a Roth IRA, further IRS guidance on rollovers and conversions is expected.

Open accounts as early as possible to maximize compounding growth. Investment earnings grow tax-deferred, and withdrawals for qualifying expenses (education, home purchase, job training) are tax-free.

While 529 plans are great for education, Trump Accounts offer broader usage—like first-home purchases or starting a business. Grandparents and others seeking gifting strategies can contribute annually, reducing their estate size while planning to support their grandchildren’s futures. Note that gifts may trigger annual gift tax rules.