How the 2025 Tax Law (OBBBA) Changes Your 2026 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

The deduction covers the "and-a-half" premium part of overtime pay (the extra half in time-and-a-half), up to $12,500 a year. 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 of that premium portion — anything above is taxed as usual.

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

Taxpayers age 65 or older receive an additional $6,000 deduction (and $6,000 more for a spouse who is 65 or older), if total income is under $75,000 ($150,000 if married filing jointly). This stacks on top of the standard deduction — 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 on a loan for a newpersonal vehicle assembled in the United States — up to $10,000 per year — is now deductible. This is notable because you don't need to itemize to claim it. Even if you take the standard deduction, the interest still reduces your taxable income.

Who qualifies:per the IRS, the vehicle must be a car, minivan, van, SUV, pickup truck or motorcycle (under 14,000 pounds) that had its final assembly in the United States; you must be its first owner (used vehicles don't qualify); the loan must have been taken out after December 31, 2024 and be secured by a first lien on the vehicle; and the deduction phases out above $100,000 of income ($200,000 if married filing jointly). Loans on used cars, or on vehicles assembled abroad, don't count.

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 the 2025 tax law (OBBBA). 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 ($40,400 for 2026). 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.

The worksheet lines add up to line 15, and line 15 is the number you enter in Step 4(b). Everything above comes from the 2026 Form W-4. The calculator on this site applies the same caps and income limits as the worksheet. The real deductions shrink gradually above a limit, while the W-4 worksheet uses a simple cut-off, so if your income is near a limit, use the worksheet or the IRS estimator. For married filing jointly the calculator only sees this job's pay, not your spouse's.