Options Guide Shows the “No Tax On” Deductions Are Costly and Complex

TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Foundation’s new book, Options for Reforming America’s Tax Code 3.0: A Policymaker’s Guide to Tax Reform Trade-Offs, models the economic, distributional, and revenue effects of 86 different changes to the tax code. Four options would extend new One Big Beautiful Bill Act (OBBBA) tax cuts that are scheduled to expire after 2028: the enhanced senior deduction, the overtime deduction, the tips deduction, and the auto loan interest deduction.

President Trump and members of Congress in both parties support these “no tax on” provisions. Extending them would increase the primary deficit by $577.3 billion from 2027 through 2036. Because the provisions interact with one another, their combined cost is smaller than the sum of their standalone estimates.

Beyond the fiscal cost, these deductions make the tax code more complex and less neutral, and they have inspired additional carveout proposals that would further complicate the code.

Make Permanent the Deduction of Overtime Pay from Taxable IncomeTaxable income is the amount of income subject to tax, after deductions and exemptions. Taxable income differs from—and is less than—gross income.   (Option 34)

From 2025 through 2028, taxpayers can deduct up to $12,500 of qualified overtime pay ($25,000 for married couples filing jointly). The deduction is only for the “half” portion of time-and-a-half overtime pay required under the Fair Labor Standards Act (FLSA), as illustrated in Table 1 below.

Table 1. Federal Income Tax Cut from Overtime Deduction at 12% Marginal Rate

Note: For simplicity, we assume Jack’s total wages and modified adjusted gross incomeFor individuals, gross income is the total of all income received from any source before taxes or deductions. It includes wages, salaries, tips, interest, dividends, capital gains, rental income, alimony, pensions, and other forms of income. For businesses, gross income (or gross profit) is the sum of total receipts or sales minus the cost of goods sold (COGS)—the direct costs of producing goods are the same.
Source: Author calculations.

The deduction is available to both itemizers and non-itemizers and begins to phase out when a taxpayer’s modified adjusted gross income rises above $150,000 for single filers and $300,000 for joint filers.

Making the overtime deduction permanent would increase the primary deficit by $372.4 billion over 10 years on a conventional basis. A permanent overtime deduction would increase the long-run size of the economy by 0.1 percent by lowering tax rates for eligible workers not in the phaseout range.

The overtime deduction has confused workers and employers, especially over what kind of overtime pay qualifies. It also makes the tax code less neutral: two workers can earn the same $50,000 in compensation, but if one receives $5,000 of that in overtime, then she will pay less in taxes than the worker with no overtime.

Make Permanent the Deduction for Auto Loan Interest Paid (Option 36) 

From 2025 through 2028, taxpayers can deduct up to $10,000 for interest paid on certain auto loans. The loan must be for a new vehicle, and final assembly of the vehicle must occur in the US.

The deduction is available to both itemizers and non-itemizers and begins to phase out when the taxpayer’s modified adjusted gross income rises above $100,000 for single filers and $200,000 for joint filers.

Making the auto loan interest deduction permanent would increase the primary deficit by $33.7 billion over 10 years on a conventional basis.

While extending the deduction would decrease marginal tax rates for eligible borrowers, marginal tax increases for taxpayers in the phaseout range would cancel any positive economic effects. A permanent auto loan interest deduction would decrease the long-run size of the economy by less than 0.05 percent.

Auto lenders have noted that complying with the law’s reporting obligations is challenging, and taxpayers have been left wondering which cars are eligible. The auto loan deduction also adds to an uneven patchwork in the tax code. Certain mortgage interest, auto loan interest, and student loan interest can qualify for deductions, while other forms of consumer interest, such as credit card interest, are not deductible.

Make Permanent the Enhanced Senior Deduction (Option 33)

From 2025 through 2028, taxpayers aged 65 and over can claim a $6,000 additional deduction. The deduction is available to both itemizers and non-itemizers and begins to phase out when the taxpayer’s modified adjusted gross income rises above $75,000 for single filers and $150,000 for joint filers. The deduction is scheduled to expire in 2029.

Making the enhanced senior deduction permanent would increase the primary deficit by $137.9 billion over 10 years on a conventional basis. A permanent senior deduction would increase the long-run size of the economy by less than 0.05 percent by lowering marginal tax rates for seniors not in the phaseout range, though it would raise marginal tax rates for those subject to the phaseout. The deduction has a smaller impact than other labor tax changes as the cut mostly benefits retired workers.

The deduction would tend to benefit filers in the lower-middle and middle-income quintiles, as lower-income filers have little to no tax liability after the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. Taxpayers who take the standard deduction cannot also itemize their deductions; it serves as an alternative., and higher-income filers are limited by the deduction phaseout.

The enhanced senior deduction clutters the tax code and is easily confused with the existing additional standard deduction for taxpayers age 65 and older. It also weakens the Social Security trust fund by reducing taxes paid on Social Security benefits that are remitted to the fund. 

Make Permanent the Deduction of Tip Income from Taxable Income (Option 35)

Workers earning tipped income can deduct up to $25,000 in tips from 2025 through 2028. The deduction phases out when modified adjusted gross income exceeds $150,000 for single filers and $300,000 for joint filers.

Making the deduction permanent would increase the primary deficit by $45.9 billion on a conventional basis and increase the long-run size of the economy by less than 0.05 percent by lowering marginal rates for some workers.

The tipped income deduction is only available for an arbitrary subset of labor compensation, requiring detailed rules on which occupations qualify and guardrails to prevent recategorization of labor income to take advantage of the deduction. For example, two workers providing similar services can receive the same total compensation, but a worker who receives part of that compensation in qualified tips can pay less tax than a worker whose compensation consists entirely of wages.

The deduction also provides little benefit to filers in the bottom 20 percent of income, as the standard deduction already offsets most of their tax liability before taking advantage of the new provision.

Big Picture

The “no tax on” deductions show the drawbacks of using narrowly tailored provisions to provide tax relief. Making these four narrowly targeted OBBBA deductions permanent would reduce federal revenue by roughly $577 billion over 10 years. Combined, the changes would modestly increase the long-run size of the economy, but they would also retain phaseouts that raise marginal tax rates for some taxpayers, create eligibility disputes, and treat otherwise similar taxpayers differently.

Rather than extending these temporary carveouts, Congress should allow them to expire after 2028 and pursue broader, more neutral tax reforms. A simpler tax code with fewer narrow provisions would treat similar income similarly, reduce compliance burdens and opportunities for tax planning, and provide a more durable foundation for pro-growth tax policy.

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