The One Big Beautiful Bill Act introduced three new tax deductions effective 2026: overtime pay, tipped wages, and auto loan interest. Here's exactly how they work, who qualifies, and what the 2026 standard deduction and tax brackets look like.
The One Big Beautiful Bill Act (OBBBA) was signed into law in July 2025, introducing several tax provisions that take effect in 2026. For federal employees, the most relevant changes are three new "above-the-line" deductions — meaning they reduce your income even if you take the standard deduction. Here's what changed and how to calculate your benefit.
If you earned overtime pay in 2026, you can deduct the premium portion — the extra compensation above your regular rate — from your taxable income.
Limits:
MAGI phase-out: This deduction phases out for higher earners. For single filers, it begins to reduce once your MAGI (Modified Adjusted Gross Income) exceeds $150,000 and phases out completely above that threshold. For married filing jointly, the threshold is $300,000.
For a GS-13 employee in a major metropolitan area earning $15,000 in overtime premium pay and filing single with income under $150,000:
Overtime deduction: $12,500 (capped at the single limit) At a 22% marginal rate: $2,750 in tax savings
If you received tips as part of your compensation, you can deduct those from your taxable income under the same limits and MAGI thresholds as the overtime deduction.
Limits:
This provision is primarily targeted at tipped workers in hospitality and food service, but applies to any taxpayer who receives tips as compensation. Federal employees who work secondary jobs or have tip-eligible income benefit as well.
Interest paid on a loan for a new personal vehicle purchased in 2026 is deductible, up to a point.
Limit: The interest deduction is available for income below $100,000 MAGI (single) or $200,000 MAGI (MFJ). There is no stated dollar cap in the legislation, though the deduction is limited to the actual interest paid.
For a federal employee who purchased a new vehicle in 2026 and paid $3,200 in auto loan interest with income under the threshold:
Auto loan interest deduction: $3,200 At 22% marginal rate: $704 in tax savings
These three deductions stack — you can claim all three if you qualify for each.
Most federal employees take the standard deduction rather than itemizing. The 2026 figures:
| Filing Status | Standard Deduction |
|---|---|
| Single | $16,100 |
| Married Filing Jointly | $32,200 |
| Head of Household | $24,150 |
| Married Filing Separately | $16,100 |
The OBBBA deductions (overtime, tips, auto loan interest) are above-the-line deductions taken before you reach the standard deduction calculation. This is important: you claim the OBBBA deductions regardless of whether you itemize or take the standard deduction.
The OBBBA also introduced a $6,000 additional deduction for taxpayers age 65 and older. This is available regardless of whether you itemize or take the standard deduction, similar to the other OBBBA provisions.
MAGI threshold: $75,000 for single filers; $150,000 for married filing jointly.
For federal retirees in the 62+ age bracket, this provides meaningful additional tax relief.
For reference, the 2026 income tax brackets:
Single filers:
| Taxable Income | Rate |
|---|---|
| $0 – $12,400 | 10% |
| $12,400 – $50,400 | 12% |
| $50,400 – $105,700 | 22% |
| $105,700 – $201,775 | 24% |
| $201,775 – $256,225 | 32% |
| $256,225 – $640,600 | 35% |
| Over $640,600 | 37% |
Married filing jointly:
| Taxable Income | Rate |
|---|---|
| $0 – $24,800 | 10% |
| $24,800 – $100,800 | 12% |
| $100,800 – $211,400 | 22% |
| $211,400 – $403,550 | 24% |
| $403,550 – $512,450 | 32% |
| $512,450 – $768,700 | 35% |
| Over $768,700 | 37% |
The OBBBA deductions come after your TSP Traditional contributions and pre-tax FSA/HSA elections reduce your gross income. In planning terms:
Maximizing your Traditional TSP contributions first lowers your MAGI, which can keep you under the OBBBA phase-out thresholds — a meaningful sequencing consideration for higher-earning employees.
The OBBBA provisions are currently scheduled through tax year 2028, subject to Congressional extension. Retirement planning projections should account for the possibility that these deductions may not be available after 2028. High-3 Retirement Planner applies OBBBA deductions for the 2026 tax year calculation and notes their scheduled expiration.
High-3 Retirement Planner applies all OBBBA deductions automatically when you enter your overtime pay, tips, and auto loan interest. The tax report shows your exact estimated federal income tax, marginal rate, effective rate, and how much each deduction saved you.
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