The new tax act’s “no tax on” and state and local tax (SALT) deduction provisions will cause taxpayers in all quintiles to spend more time filing taxes when compared to a straight extension of the Tax Cuts and Jobs Act, says the Yale Budget Lab.
The tax act (P.L. 119-21), formerly known as the One Big Beautiful Bill, establishes new deductions for tips, overtime, and auto loan interest and an additional standard deduction for seniors. It also increases the SALT deduction cap. But along with these tax benefits come new administrative burdens, including recordkeeping and reporting requirements.
For taxpayers in the lowest quintiles, the Budget Lab says the “no tax on” provisions increase filing burden, on average. Taxpayers in the lowest quintile can expect to spend an additional 1.8 hours on tax administrative tasks, as compared to under the TCJA. And those in the second lowest quintile may see a 36-minute increase.
That’s because the “no tax on” provisions “are aimed at lower income groups,” says the Budget Lab. Despite the potential for tax savings, “there is cost to those benefits – additional time burden,” adds the group.
For taxpayers in the higher quintiles, changes to the SALT deduction cap will increase filing burdens, as opposed to under the TCJA, according to the Budget Lab. The reason is that the TCJA’s $10,000 cap “reduced the number of itemizers and therefore, the overall burden of filing taxes,” the group explains. The cap is now set, temporarily, at $40,000 with an income-based phase out.
These new administrative burdens will come into play during the upcoming filing season. The three “no tax on” provisions, the senior deduction, and the increased SALT deduction cap are all effective as of January 1, 2025, and extend through 2028.
Those provisions are just a few among the plethora of new and revised provisions going into effect over the next year, as detailed in the Center for American Progress’ implementation timeline.
It’s not just the Budget Lab that is worried about the burdens under the new act. The law “worsened the tax code by increasing complexity and narrowing the tax base,” says the Tax Foundation. Among the more complex may be the new overtime, tip, and auto loan interest deductions.
Overtime
Under the new act, employees can take up to a $12,500 above-the-line deduction for qualified overtime compensation, as defined by the Fair Labor Standards Act (FLSA). ($25,000 for joint filers)
The overtime provision “is a more complicated proposal” than some of the other new deductions, says the Tax Foundation. “[E]xempting a portion of wage income, based on hours worked, introduces an entirely new distinction in the tax code,” it explains. And it will require “additional information reporting of hours, likely from employers and employees, as well as new administrative checks.”
And because the deduction is rooted in the FLSA definition of overtime, says the Budget Lab, “employers and employees must understand both federal labor laws and federal tax laws to determine what constitutes eligible overtime.”
Beyond that, eligible workers “must also ensure their overtime compensation is properly reported on Form W-2 to claim the deduction, making them dependent on employer compliance with new reporting requirements,” says the Budget Lab. And because the act allows employers to, for 2025, use yet-to-be-defined “reasonable methods” to approximate overtime, the Budget Lab predicts “inconsistent treatment” and “potential compliance issues.”
Tips
The act allows certain workers to deduct up to $25,000 in tips annually, with a phase out for those earning $150,000 or more.
The Budget Lab explains that, under the new act, deductible tips are only those that are ” voluntary and customer-determined.” Because of this limitation, workers will need to distinguish between “legitimate tips” – which are deductible – and mandatory service charges.
Tipped work is “a small sliver of the labor market,” according to the Budget Lab’s Ernie Tedeschi, so fewer taxpayers will be impacted by the new tips deduction. Even so, the Tax Foundation predicts that the deduction “may increase complexity and require safeguards in regulation to prevent reclassification of income from wages to tips to take the deduction.”
Auto Loan Interest
Taxpayers can deduct up to $10,000 per year for auto loan interest, with a phase out for those earning over $100,000 ($200,000 for joint filers). The deduction is limited to new vehicles for personal use that had final assembly in the U.S.
According to the Budget Lab, “loan tracking requirements” to claim the deduction will likely be burdensome. Documentation must show “interest payments separately from principal payments throughout the loan term,” the group explains. However, because “[i]nterest payments on loans are front-loaded,” it adds, “the deduction will decline after the initial year, requiring taxpayers to track changing benefit amounts.”
The domestic final assembly requirement also may pose a challenge. “[T]he bill does not provide an exhaustive definition of what ‘final assembly’ means,” notes the Budget Lab. The Tax Foundation suggests “[i]t is likely that dealerships will need to help taxpayers confirm that an automobile qualifies for the deduction.”
Because of the administrative burdens and the 2028 sunset, the Budget Lab says, the “practical impact” of the auto loan interest provision for “most taxpayers is more limited than the maximum benefit suggests.”
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