Methodology
Rules verified Ruleset 2026.1P.L. 119-21 (OBBBA) § 70201 — qualified tips deduction, IRC § 224
The engine does the same seven things every time it is called
There is one entry point, and it takes one household. Steps 3 to 6 then run twice: once on the household as entered, and once on the same household with $1,000 more income. The difference between those two runs is the number most people actually need.
- Validate. Age and spouse age must be finite and between 0 and 130. Money inputs must be whole cents and non-negative. A bad value throws rather than being coerced into something plausible.
- Resolve the rule set. One bundle per tax year. An unsupported year throws — the engine will not quietly reuse last year's caps.
- Compute MAGI once, from the household's income inputs.
- Run all four deductions against that one MAGI. They are independent: none reads another's output, so their order cannot change the answer.
- Sum the four results into a single deduction total.
- Convert the total to federal tax saved on the bracket table.
- Re-run and subtract. The whole of steps 3–6 runs again with $1,000 added to other income; the difference in tax is the marginal figure, and the difference in deductions is what that $1,000 cost you in reliefs.
MAGI is built from gross pay, and nothing here reduces it
MAGI = base wages + tips + gross overtime pay + other income. The OBBBA deductions never reduce MAGI themselves, which is exactly why one raise can shrink several of them at once.
Overtime enters MAGI at the full multiplier and enters the deduction at half of it, and that asymmetry is not a rounding artifact — it is the design. On 175 overtime hours at a regular rate of $23.33, straight-time pay is $4,082.75. The engine multiplies that by the pay multiplier to reach $6,124.13 of gross overtime for MAGI, and separately by the deductible share to reach $2,041.38 of qualified premium. The same hours push MAGI toward the phase-out threshold roughly three times as fast as they build the deduction.
One limitation matters more than the rest. This MAGI has no subtraction term, where the statutory figure is adjusted gross income plus a short list of foreign-income exclusions — and adjusted gross income is gross income less above-the-line adjustments such as health savings account and traditional IRA contributions, deductible self-employment tax, self-employed health insurance and student-loan interest. The engine therefore overstates MAGI for anyone who has those, which can understate their deduction near a phase-out edge. It is recorded as a documented approximation, not a value awaiting correction, in the repository's KNOWN-GAPS.md register.
Qualified tips: six gates, then the cap, then the phase-out
deduction = min(reported tips, $25,000), then reduced by $100 for each whole $1,000 of MAGI over the threshold. Source 1: P.L. 119-21 (OBBBA) § 70201 — qualified tips deduction, IRC § 224, verified 8 Aug 2026 Requires a qualified occupation (the list), properly reported tips, and a joint return if married.
The engine checks six conditions before it computes anything, and it stops at the first one that fails, so the reason you are shown is the first reason and not a list. In order: tips were entered at all; the amount is above zero; the filing status is not married filing separately; an occupation code was chosen; that code is on the qualified list; and the tips were properly reported through a W-2, a tip report, an allocation form or self-employment income. Only then does the cap apply, and only after the cap does the phase-out.
Worked: $5,000 of qualified tips, single, at a MAGI of $153,500. The excess over the $150,000 threshold is $3,500, which is 3 whole steps once the fraction is dropped, so the reduction is $300 and the deduction is $4,700. Round that same excess up instead of down and the answer moves by $100 — which is precisely the error a verification pass found and corrected in this engine.
| Annual cap | $25,000 |
|---|---|
| Phase-out threshold (single) | $150,000 |
| Phase-out threshold (joint) | $300,000 |
| Reduction per $1,000 of excess | $100 |
| Partial step rounds | down |
| Rule set | tips-2026.1 |
Qualified overtime: the deductible part is a third of the paycheck
Only the FLSA premium qualifies: premium = overtime hours × regular rate × 0.5, or total time-and-a-half pay ÷ 3. The whole time-and-a-half paycheck is not deductible, and this is the single most common error on a return. Source 2: 29 U.S.C. § 207 (FLSA overtime premium definition), verified 8 Aug 2026
The divisor is not a constant. The engine derives it from two rule values, the assumed pay multiplier 150.0% divided by the deductible share 50.0%, so a rule change moves the arithmetic rather than requiring a code change. Both input modes reach the same place: enter hours and a rate and the premium is built up; enter a total and it is divided down.
Two limits on qualified overtime are described in the rule file and not enforced by the engine, and both cut the same way. Pay above the FLSA-required premium — a contractual double-time rate, for instance — is not qualified overtime, so only the half-time portion counts however the shift was paid. And overtime owed to an FLSA-exempt employee under state law or a collective agreement is not qualified at all. A fixed multiplier cannot see either case, so the engine will accept an entry it should have refused.
| Cap (single) | $12,500 |
|---|---|
| Cap (joint) | $25,000 |
| Deductible share of the hour | 50.0% |
| Assumed pay multiplier | 150.0% |
| Phase-out threshold (single) | $150,000 |
| Reduction per $1,000 of excess | $100 |
| Partial step rounds | down |
| Rule set | overtime-2026.1 |
The senior deduction is reduced per person, then added up
$6,000 per person aged 65 or over, reduced by 6.0% of MAGI over the threshold — a different phase-out model from the tips and overtime step, with no $1,000 unit and so no step-rounding rule to get wrong. Source 3: P.L. 119-21 (OBBBA) § 70103 — additional deduction for seniors (65+), verified 8 Aug 2026
The order of operations decides the answer on a joint return, and getting it backwards is worth thousands. The reduction is taken against the per-person amount first, and the reduced figure is then entered once for each qualifying spouse. Two seniors therefore lose the percentage twice, not once. Worked: a joint return, both spouses over 65, MAGI $200,000. The excess over $150,000 is $50,000; 6.0% of it is $3,000; each spouse's $6,000 falls to $3,000; the household total is $6,000. Applying the percentage once to the doubled amount instead returns a larger and wrong figure.
| Qualifying age | 65 |
|---|---|
| Amount per person | $6,000 |
| Phase-out threshold (single) | $75,000 |
| Phase-out threshold (joint) | $150,000 |
| Reduction rate | 6.0% |
| Rule set | senior-2026.1 |
Car-loan interest fails on any one condition, and reports all of them
Interest up to $10,000 on a loan for a new, personal-use vehicle with final assembly in the United States, originated on or after 2025-01-01. Miss any one of those conditions and the whole deduction goes. Source 4: P.L. 119-21 (OBBBA) § 70203 — qualified passenger vehicle loan interest deduction, verified 8 Aug 2026
This is the one deduction where the engine deliberately does not stop at the first failure. It tests all four conditions, collects every reason, and returns the set — so a used import bought for a delivery business is told three things rather than one and can see there is nothing to fix. It is also the only one of the four with no joint-filing requirement: married filing separately bars the other three outright, and this one it does not touch.
Worked, and note the direction of travel: $6,200 of interest, single, MAGI $110,400. The excess over $100,000 is $10,400, and because this rule counts a part step as a whole one that is 11 steps, not ten. At $200 a step the reduction is $2,200 and the deduction is $4,000. The step is twice the tips and overtime rate against a cap that is smaller, so this deduction disappears far faster than the headline thresholds suggest.
| Annual cap | $10,000 |
|---|---|
| Loan originated on or after | 2025-01-01 |
| Phase-out threshold (single) | $100,000 |
| Phase-out threshold (joint) | $200,000 |
| Reduction per $1,000 of excess | $200 |
| Partial step rounds | up |
| Rule set | car-loan-2026.1 |
Two phase-out models, three rounding directions
Tips, overtime and car-loan interest all step: take the MAGI above the threshold, divide by $1,000, and multiply the whole number of steps by that rule's per-step reduction. The senior deduction does not step at all — it takes a flat percentage of the excess. Both models floor at zero, and the reduction is additionally clamped to the capped amount, so no deduction can be reduced past nothing or turn negative.
The three step rules do not round the same way, and harmonising them would be a bug rather than a tidy-up. Tips and overtime drop a partial step; car-loan interest counts a partial step as a whole one. The engine holds each direction in its own rule file as a boolean, and the difference is visible above: an excess of $3,500 costs 3 steps under the tips rule, while a fractional excess under the car-loan rule is rounded up to the next whole step before the reduction is taken.
Because the reduction is a function of the amount claimed, each deduction has a MAGI at which it reaches zero. For a single filer claiming the full cap, the engine computes these exhaustion points directly rather than leaving a reader to divide.
| Qualified tips | $400,000 |
|---|---|
| Qualified overtime | $275,000 |
| Senior, per qualifying person | $175,000 |
| Car-loan interest | $150,000 |
Read that table as a ranking of fragility rather than a set of thresholds. The car-loan deduction begins phasing out later than the senior deduction and still reaches zero first, which is how a household can lose it outright while collecting most of its tips deduction and part of its senior deduction. One line explains the whole ordering: an identical $1,000 of extra MAGI removes $200 of car-loan deduction against $100 of tips deduction, and $60 of senior deduction per qualifying person.
Money is integer cents, and rounding is half-up except where the form says otherwise
Currency is never a float. Every amount is an integer number of cents and every rate is basis points, so 6% is carried as 600 and never as 0.06. Multiplication by a rate divides by 10,000 and rounds the result half-up to the nearest cent; division does the same. Subtraction that must not go below zero has its own function, so a floor is never left to a comparison somebody forgets to write. Public functions assert their money inputs are whole, non-negative cents and throw a typed error otherwise — the engine fails loudly instead of coercing a bad input into a plausible answer.
Three roundings coexist and they are genuinely different operations. Rate multiplication rounds half-up to the cent, which is what turned $4,082.75 of straight-time pay into a premium of exactly $2,041.38 in the example above. The $1,000 step for tips and overtime rounds down, and it is a floor rather than a half-up round, which are not the same operation: an excess of $500.01 becomes a whole step under half-up rounding and no step at all under a floor. The $1,000 step for car-loan interest rounds up, so the same excess becomes a whole step there.
One rounding question is open rather than settled, and it stays labelled as open. No source states a sub-dollar convention for these four computations: the computation of record prescribes the $1,000-step rounding and the senior percentage but says nothing about cents. Working in integer cents and rounding half-up is defensible and is not something the IRS has stated. It can move a result by about a dollar, and it is filed as unresolved in the engine documentation rather than presented as verified.
Tax saved is computed twice on the bracket table, never as rate × deduction
Taxable income is MAGI − standard deduction, floored at zero. The engine walks the bracket table for the filing status, taxing each slice at its own rate and rounding each slice half-up, and it does this twice: once on taxable income before the OBBBA deductions and once after. The reported saving is the difference between the two figures.
That is not the same as multiplying by a marginal rate, and the gap is largest for exactly the households a deduction helps most. Worked: a single filer with $130,000 of MAGI and $30,000 of deduction. The standard deduction of $16,100 leaves $113,900 of taxable income, which falls to $83,900. Federal tax goes from $19,934 to $13,170, a saving of $6,764. The marginal rate at that income is 24.0%, so the shortcut would have claimed $7,200 — overstating the saving by $436, because the deduction crosses a bracket boundary on its way down.
The per-line “worth $X at your bracket” annotations on the pay statement are the deduction valued at the top rate, so they will not always sum to the exact headline saving. The headline is the one to trust; the annotations exist to show which line is doing the work.
The marginal rate on the next $1,000 can exceed your bracket
Above a threshold, an extra $1,000 of income is taxed twice: once by the bracket, and once by the deductions it removes. The engine does not model this with a formula. It re-runs the entire computation with $1,000 more income and subtracts, so whatever interaction exists between the four phase-outs is in the answer whether or not anyone anticipated it.
Worked: a single tipped worker with $148,000 of wages and $10,000 of properly reported qualified tips. MAGI is $158,000 and the household's OBBBA deductions total $9,200. Earn one more thousand and $100 of deduction disappears, so the extra federal tax is $264 — an effective marginal rate of 26.4% against a statutory bracket of 24.0%. A household with three of these deductions in range sees a steeper gap again, which is the case no single-deduction calculator can show you.
What this engine does not model, and what that costs you
- State income tax — not modelled at all. Every figure on this site is federal. A deduction that saves federal tax may or may not follow through to your state return, and this engine takes no position on it.
- FICA — not reduced. Tips and overtime remain subject to Social Security and Medicare tax in full. The deduction never touches them, so the take-home effect of a tips deduction is smaller than the deduction amount suggests.
- The pre-existing extra standard deduction for people 65 and over. It stacks with the senior deduction rather than replacing it and is not in the bracket rule file, so every senior household's total deduction here is understated and its tax saving may be valued at the wrong marginal rate.
- Above-the-line adjustments. See the MAGI note above: no subtraction term, so MAGI is overstated for anyone who has them.
- Most car-loan eligibility conditions. The engine checks four. The rule file records several more that it does not enforce — a gross vehicle weight limit, a restriction to particular vehicle classes, a first-lien requirement, exclusions for leases, fleet sales, salvage and scrap vehicles and related-party loans, a cap on refinancing at the balance refinanced, and a vehicle identification number reporting requirement. The engine will not stop you claiming a vehicle that does not qualify.
- The self-employment limit on tips. A self-employed tip earner's deduction cannot exceed net income from the business the tips came from. The engine flags this and assumes the tips you entered already respect it.
- Credits and itemising. Out of scope in v1. The tax saved is computed against the standard deduction and the ordinary bracket table only.
Each of these is recorded in the repository rather than only here: the per-figure verification record in VERIFICATION-STATUS.md, and the open-items register in KNOWN-GAPS.md. The list on this page can therefore be checked against the code rather than taken on trust, and what is still outstanding is summarised on the changelog and in more detail on the about page.
What this engine never does
- No AI computes, estimates, or adjusts any number.
- No figure ships without a citation — see Sources.
- Your inputs never leave your browser: no accounts, no database, localStorage only.