Why Trump’s tax deductions for tips, car loans, and overtime may offer little value to low-income earners

For working Americans hoping for meaningful tax relief, the Senate’s approval of Trump’s 2025 tax package might sound like good news. After all, deductions for car loans, tips, and overtime seem designed to reward effort. But if you earn under $40,000—or have minimal taxable income—you may not see the benefit you expect.

Let’s break down what the new deductions offer, how they really work, and whether they align with your financial reality.

The new legislation—originally dubbed the One Big Beautiful Bill Act—offers a slate of tax deductions set to take effect from 2025 through 2028. These include:

• Car loan interest: Deduct up to $10,000 in annual interest from new car loans.
• Tips: Deduct up to $25,000 in reported tip income each year.
• Overtime pay: Deduct up to $12,500 (or $25,000 for couples filing jointly) of overtime income.
• Senior deduction: Adults 65 and older can deduct an additional $6,000 from taxable income.

The bill also raises the standard deduction slightly: to $15,750 for singles and $31,500 for joint filers. These changes are framed as worker-friendly—but understanding who they help depends on one thing: your taxable income.

A tax deduction reduces the portion of your income that gets taxed. It doesn’t reduce your tax bill directly. That’s important.

Here’s an example:
If you deduct $1 and you’re in the 10% tax bracket, you save 10 cents.
If you’re in the 32% bracket, you save 32 cents for that same $1.

The deduction value increases with your income. That means the same deduction benefits a higher-income household more—even if the amount deducted is identical.

The standard deduction is already quite generous—especially for low- to middle-income households. In 2025, it’s projected to be:

• $15,750 for single filers
• $31,500 for married couples filing jointly

That means if your total income falls below that threshold (after workplace contributions, deductions, or dependents), you likely won’t owe any federal income tax. So if you’re a tipped worker earning $28,000 a year, you may already owe nothing—making the new tip deduction moot. According to Yale’s Budget Lab, over one-third of tipped workers paid no federal income tax in 2022. That trend is unlikely to shift under the new plan.

Ask yourself:

• Do I usually itemize my deductions?
• Is my taxable income above the standard deduction threshold?
• Am I in a higher tax bracket (22% or more)?

If the answer to all three is yes, then these deductions might be worth optimizing. Otherwise, they may have little or no impact on your tax bill.

Let’s compare two scenarios.

Scenario A:
Emma is a single waitress earning $28,000 in 2025, most of it through tips.
Standard deduction: $15,750
Taxable income: $12,250
She owes very little in tax—and a tip deduction won’t lower her bill meaningfully.

Scenario B:
Daniel is a mid-career tech worker earning $140,000. He works overtime and finances a new car.
Standard deduction: $15,750
Taxable income: $124,250
He deducts $10,000 in car loan interest and $12,000 in overtime pay. If he’s in the 24% bracket, these deductions lower his tax bill by roughly $5,280.

Same deductions. Very different outcomes.

Some taxpayers may find targeted benefits:

• Seniors with other taxable income (pension, dividends, part-time work) may use the $6,000 deduction to lower their overall liability.
• Married couples filing jointly who earn significant combined overtime could benefit from the $25,000 limit on OT deductions.

Still, the value depends on taxable income remaining after the standard deduction and any other adjustments.

If you’re not in a high tax bracket—or if your income is already fully offset by the standard deduction—there are still ways to optimize:

• Track your eligibility for refundable credits like the Earned Income Tax Credit (EITC) or Child Tax Credit. These reduce your tax bill directly—and in some cases, offer a refund even if you owe no tax.
• Focus on take-home income, not just deductions. Look for employer retirement contributions, education credits, or lower-cost insurance options. Even a 1% shift in net pay or household benefits can create room to save.
• Consider contribution-based vehicles, like Roth IRAs or HSAs, which offer long-term tax advantages and aren’t tied to itemized deductions.
• Plan ahead if you expect a higher-income year (e.g., side gig, bonus, asset sale). Deductions only help when you have taxable income to shield.
• Review your filing status annually, especially if you’ve had a major life event—marriage, divorce, a new dependent, or loss of income. The right status can affect access to tax credits and eligibility thresholds more than you might expect.
• Use tax season as a check-in, not just a compliance step. If you’re not gaining ground financially, that’s a sign to adjust your savings ratios, debt payments, or benefits selection at work.

Small, consistent financial decisions often matter more than chasing tax changes you can't control. Let your planning reflect your real life—not the headlines.

There’s nothing inherently wrong with deductions. But they reward income—and often, income that already exceeds basic living costs. That’s not a criticism. It’s a design feature. If you earn less than $40,000, you’re unlikely to see a dramatic benefit from these new deductions. But your plan doesn’t need to change because of that. Financial clarity starts by understanding which levers are available to you—and which ones are noise.

Stay focused on what you can control: your income streams, savings rate, and eligibility for credits. Not all relief is visible at first glance—but with the right plan, you can still build long-term stability.