2026 Tax Law Changes: What the One Big Beautiful Bill Means for Your Return

The 2026 tax law changes from the One Big Beautiful Bill Act (OBBBA, signed July 4, 2025) are the biggest shake-up to individual returns since 2018. Tips and overtime get their own deductions, seniors get an extra $6,000, the SALT cap quadruples, and some new-car loan interest becomes deductible. This guide walks through each change with real numbers, shows who actually benefits, and flags the places where Virginia does not follow the federal rules.

The big picture: what changed for 2026 returns

The OBBBA did two things at once. First, it made the 2017 tax cuts permanent: the seven brackets (10% to 37%), the larger standard deduction, the bigger Child Tax Credit and the 20% qualified business income (QBI) deduction would otherwise have expired after 2025. Second, it added new, mostly temporary breaks aimed at working families and retirees.

You will see most of these changes for the first time on the 2026 return you file in early 2027. Some of them (tips, overtime, seniors, car loans, SALT) started with 2025 returns. For 2026, a new Schedule 1-A collects the four new deductions, and new W-2 codes report tips and overtime directly.

No tax on tips and no tax on overtime

These two deductions get the most attention, and they are also the most misunderstood. Neither one makes the money truly tax-free. Social Security and Medicare taxes still apply, your employer still withholds, and the income still counts on your Virginia return. What changes is your federal income tax: you subtract the qualifying amount on Schedule 1-A.

Tips: deduct up to $25,000

Qualified tips are voluntary cash or card tips from customers (including tip-pool shares) received in an occupation that customarily and regularly received tips. Treasury issued final regulations listing those occupations in April 2026. Servers, bartenders, hairstylists, delivery drivers and many gig workers are typical examples. Self-employed tip earners can qualify too, but the deduction cannot exceed their net business income from that work.

For 2026, your employer reports qualified tips on your W-2 in box 12, code TP, with an occupation code in box 14b. Independent contractors see them on Form 1099-NEC, 1099-MISC or 1099-K. The deduction shrinks by $100 for every $1,000 of modified AGI over $150,000 ($300,000 joint).

Overtime: only the “half” in time-and-a-half

The overtime deduction covers only overtime that the Fair Labor Standards Act (FLSA) requires, and only the premium above your regular rate. If you earn $30 an hour and get $45 for overtime hours, $15 of each overtime hour qualifies. Overtime that the FLSA does not require (for example, paid only under a union contract or company policy) does not qualify, and if your employer pays double time, only the FLSA-required half counts. The cap is $12,500 per return ($25,000 joint), reduced by $100 per $1,000 of modified AGI over $150,000 ($300,000 joint).

For 2026, look for W-2 box 12, code TT. Federal civilian employees in the Fredericksburg area can confirm FLSA status on their SF-50: block 35 shows “N” for nonexempt (overtime-eligible) and “E” for exempt.

The $6,000 senior deduction and car-loan interest

Senior deduction: $6,000 per person 65 and older

If you were born before January 2, 1962, you can claim an extra $6,000 for 2026 ($12,000 if you and your spouse both qualify). It stacks on top of the regular additional standard deduction for age ($1,650 per married spouse or $2,050 if unmarried) and you can take it even if you itemize. Each person's $6,000 shrinks by 6% of modified AGI above $75,000 ($150,000 joint), so it disappears entirely at $175,000 for a single filer and $250,000 for a couple.

The law did not make Social Security benefits tax-free, but for many retirees this deduction offsets most or all of the taxable portion.

Car-loan interest: up to $10,000

You can deduct up to $10,000 a year of interest on a loan that meets all of these tests:

• The loan was originated after December 31, 2024, to buy the vehicle, and is secured by it.
• The vehicle is new (its original use starts with you); used cars do not qualify.
• Final assembly took place in the United States (check the window sticker or the VIN).
• It is a car, SUV, van, pickup or motorcycle under 14,000 pounds, used for personal purposes.
• It is not a lease. You must put the VIN on your return.

The deduction drops by $200 for each $1,000 of modified AGI over $100,000 ($200,000 joint). A single filer with $85,000 of income who paid $2,400 of interest saves about $528 federally; at $112,000 of income the same filer gets nothing.

Income limits at a glance

Every new deduction phases out as income rises, and each one uses a different range. The chart shows where the maximum deduction shrinks to zero. If your deduction is smaller than the maximum, it runs out sooner.

The SALT cap, charitable giving and itemizing

From 2018 through 2024 you could deduct no more than $10,000 of state and local taxes. For 2026 the limit is $40,400 ($20,200 married filing separately). It covers Virginia income tax (or sales tax), real estate tax and the value-based part of your car's personal property tax. Above $505,000 of modified AGI ($252,500 MFS), the cap shrinks by 30 cents per extra dollar but never falls below $10,000. The cap rises 1% a year through 2029, then drops back to $10,000 in 2030.

New charitable rules starting in 2026

• Non-itemizers can deduct up to $1,000 ($2,000 joint) of cash gifts to qualifying charities. Gifts to donor-advised funds do not count.
• Itemizers can deduct only giving above 0.5% of AGI. At $180,000 of AGI, the first $900 of gifts produces no deduction (the excess can carry forward).
• Top-bracket itemizers (37%) face a new overall limit that roughly caps the value of itemized deductions at 35 cents per dollar.
• Gambling losses are limited to 90% of winnings starting in 2026.

Families, children and Trump accounts

The Child Tax Credit is $2,200 per child under 17 for 2026, with up to $1,700 refundable if you have at least $2,500 of earned income. It phases out by $50 per $1,000 of income above $200,000 ($400,000 joint). The child needs an SSN valid for work, and at least one parent must now have a valid SSN as well. The $500 credit for other dependents is unchanged.

• Child and dependent care credit: still based on up to $3,000 of expenses ($6,000 for two or more), but the maximum credit rate rises from 35% to 50% of qualifying expenses in 2026.
• Dependent care FSA: the employer plan limit rises from $5,000 to $7,500 for 2026.
• Adoption credit: up to $17,670, with up to $5,120 refundable.
• Trump accounts: a new tax-advantaged account for children. U.S.-citizen children born from 2025 through 2028 can get a one-time $1,000 federal pilot contribution. Families and others can contribute up to $5,000 a year (employers up to $2,500) starting July 4, 2026. You elect with Form 4547, either online through your IRS account or with your 2026 return.

Business owners and 1099 workers

If you run a business or side gig around Fredericksburg, these are the changes most likely to affect your 2026 numbers:

• Form 1099-K: payment apps and marketplaces report only when you exceed $20,000 and 200 transactions. All income is still taxable whether or not you get the form.
• Form 1099-NEC and 1099-MISC: for payments made after December 31, 2025, the reporting threshold rises from $600 to $2,000 (indexed for inflation after 2026).
• Bonus depreciation: 100% first-year depreciation is permanent for qualifying property acquired after January 19, 2025.
• Section 179: for 2026 you can expense up to $2,560,000, phasing out once purchases exceed $4,090,000.
• QBI deduction: the 20% deduction is permanent. For 2026 the income threshold is $201,750 ($403,500 joint), the phase-in range widens to $75,000 ($150,000 joint), and owners with at least $1,000 of qualified business income from an active business get at least a $400 deduction.
• Mileage: the business standard mileage rate is 72.5 cents for January to June 2026 and 76 cents for July to December 2026.

What ended, what expires, and when

As of October 2, 2026, the IRS has not yet released the 2027 inflation-adjusted brackets and standard deduction. They normally come out in the fall; plan with 2026 figures until then.

What to do before the 2027 filing season

1. Check your last pay stub of the year. Make sure tips and overtime are tracked separately. If your W-2 lacks codes TP or TT, ask payroll how they will report them.
2. Gather vehicle paperwork. Keep the purchase contract, lender interest statement and VIN for any new car bought in 2025 or 2026.
3. Rerun the itemize-or-standard math. With a $40,400 SALT cap, many Virginia homeowners will itemize again. Bunching gifts may help; see our year-end planning checklist.
4. Update withholding. Bigger deductions can mean you are over-withheld. Use the IRS Tax Withholding Estimator or our 2026 tax bracket calculator.
5. Remember Virginia. Plan for Virginia tax on tips, overtime and senior income at up to 5.75%.
6. Get organized early. Our tax document checklist lists the new 2026 items to bring.

Want help applying the new rules to your own situation? Our team in Fredericksburg offers tax planning and tax preparation for individuals, families and small businesses.

Written by the Timeless Tax & Accounting teamTimeless Tax & Accounting was founded in 2020 by Nagham Alobaidi and serves clients across Virginia and in other states, in English and Arabic. Reviewed for accuracy against IRS and Virginia Tax guidance as of October 2, 2026.

This page is general information, not tax, legal or financial advice for your specific situation. Tax rules change often — talk with a professional before acting.