How the 2026 Tax Law (OBBBA) Changes Your W-4 Withholding

Tip income exclusion — up to $25,000

If you work in a tipped industry — restaurants, hotels, salons, delivery — up to $25,000 of your annual tip income is now excluded from federal income tax. This is a significant change for service workers.

What it means for your W-4: Your taxable income is reduced by up to $25,000, which lowers your withholding. Enter your estimated annual tip income in the OBBBA section of the W-4 calculator, capped at $25,000.

Important: Tips are still subject to Social Security and Medicare (FICA) taxes. The exclusion only covers federal income tax withholding.

Overtime pay exclusion — up to $12,500

Up to $12,500 of overtime pay per year is excluded from federal income tax. For workers who regularly earn overtime — manufacturing, healthcare, transportation — this can mean several hundred dollars less withheld each year.

Like the tip exclusion, FICA taxes still apply to all overtime earnings. The exclusion is capped at $12,500 — overtime above that threshold is fully taxable.

Senior bonus deduction — $6,000 for age 65+

Taxpayers age 65 or older receive an additional $6,000 deduction under OBBBA 2026. This stacks on top of the standard deduction and is automatic — no itemizing required.

To capture this on your W-4: check the "I am 65 or older" checkbox in the OBBBA section of the calculator. This adds $6,000 to your deductions, reducing your taxable income and therefore your withholding.

Auto loan interest deduction — up to $10,000

Interest paid on a personal auto loan — up to $10,000 per year — is now deductible as an above-the-line deduction. This is notable because you don't need to itemize to claim it. Even if you take the standard deduction, the auto loan interest still reduces your taxable income.

For someone with a car payment on a $35,000 vehicle at 8%, annual interest in the first few years might be $2,500–$3,000 — worth $550–$660 in tax savings at the 22% bracket.

Child tax credit raised to $2,200

The child tax credit increased from $2,000 to $2,200 per qualifying child under 17 under OBBBA 2026. If you already entered $2,000 per child in Step 3 on your current W-4, update it to $2,200 per child to capture the full credit.

SALT cap raised to $40,000

The state and local tax (SALT) deduction cap was raised from $10,000 to $40,000. For residents of California, New York, New Jersey, Massachusetts, and other high-tax states, this means more of their state income taxes and property taxes are now deductible — making itemizing significantly more valuable.

If you were previously capped at $10,000 for SALT, the additional deductible amount goes into Step 4b on your W-4 (as part of your excess itemized deductions over the standard deduction).

See: How buying a home affects your W-4 for more on SALT and itemizing.