2026 Tax Changes for Returns Filed in 2027: What's New

Tax year 2026 changes at a glance

Amounts for tax year 2026, on returns filed in 2027. MAGI is modified adjusted gross income; each benefit defines it separately, and it may differ from the AGI on your return.

IRS: Individuals and workers Rev. Proc. 2025-32 IRS: Working Families Tax Cuts

The tips, overtime, senior and car loan deductions are available whether you itemize or take the standard deduction. IRS Tax Tip 2026-12 They began in 2025, so 2026 is their second year. The tips, overtime and senior deductions require a valid Social Security number, and married couples must file jointly to claim them. The car loan interest deduction has its own rules instead: the loan, the vehicle, the VIN on the return and the income limit.

No tax on tips

You can deduct up to $25,000 of qualified tips a year. Qualified tips are voluntary cash or charged tips, including shared tips, received in an occupation that customarily and regularly received tips on or before December 31, 2024, as listed by the Treasury. IRS: No tax on tips

• Income limit: the deduction drops by $100 for each $1,000 of modified AGI above $150,000 ($300,000 joint).
• Not every tip counts: mandatory service charges aren't voluntary tips, and tips received in a specified service trade or business, such as health, law or consulting, don't qualify.
• Self-employed: the deduction can't exceed your net income from the business where you earned the tips.
• Requirements: a valid SSN on the return; married couples must file jointly.
• Years: tax years 2025 through 2028.

26 U.S.C. § 224 The deduction lowers federal income tax only; tips are still subject to Social Security and Medicare taxes.

No tax on overtime

You can deduct up to $12,500 of qualified overtime compensation, or $25,000 on a joint return. IRS: No tax on overtime

• What counts: only overtime pay required under section 7 of the federal Fair Labor Standards Act, and only the part above your regular rate. With time-and-a-half, that is the extra "half", not the whole overtime paycheck.
• Income limit: the deduction drops by $100 for each $1,000 of modified AGI above $150,000 ($300,000 joint).
• Requirements: a valid SSN; married couples must file jointly.
• Years: tax years 2025 through 2028.

26 U.S.C. § 225 Because the deduction is tied to the federal law, overtime paid only because of California's stricter rules, such as daily overtime after 8 hours that the federal law doesn't require, generally doesn't count. For 2025, employers didn't have to report qualified overtime separately, and the IRS pointed workers to the Schedule 1-A instructions to work out the amount; check what your 2026 W-2 or employer statement shows.

The $6,000 senior deduction

Each taxpayer who is 65 or older by the end of the year can claim an extra $6,000 deduction, or $12,000 for a married couple when both spouses qualify. It comes on top of the existing additional standard deduction for age, which is $1,650 for 2026, or $2,050 for an unmarried taxpayer. IRS: Senior deduction Rev. Proc. 2025-32

• Income limit: reduced by 6% of modified AGI above $75,000 ($150,000 joint).
• Requirements: the SSN of each qualifying person on the return; married couples must file jointly.
• Years: tax years 2025 through 2028.

26 U.S.C. § 151(d)(5)(C) Unlike the additional standard deduction for age, the $6,000 senior deduction is also available if you itemize. It doesn't make Social Security benefits tax-free: it is a separate deduction, and the usual rules for taxing benefits still apply.

Car loan interest deduction

You can deduct up to $10,000 a year of interest on a qualifying passenger vehicle loan, even without itemizing. 26 U.S.C. § 163(h)(4)

• The loan was taken out after December 31, 2024, to buy a vehicle for personal use, secured by a first lien on it.
• The vehicle is new (its original use starts with you), had its final assembly in the United States, and is a car, minivan, van, SUV, pickup or motorcycle under 14,000 pounds.
• Leases, fleet purchases, commercial vehicles and loans from related parties don't qualify.
• You list the vehicle identification number (VIN) on your return.
• The deduction drops by $200 for each $1,000, or part of $1,000, of modified AGI above $100,000 ($200,000 joint), but not below zero. For example, MAGI of $100,500 already reduces it by $200.
• Years: tax years 2025 through 2028.

SALT cap, charity and itemized deductions

SALT cap

The cap on state and local taxes you can deduct on Schedule A is $40,400 for 2026. It is reduced by 30% of modified AGI above $505,000, but not below $10,000, and returns to $10,000 for years after 2029. For married filing separately, the 2026 cap is $20,200, the reduction starts above $252,500 and the minimum is $5,000. 26 U.S.C. § 164(b) Property tax on a rental property isn't subject to this cap; see our guide to rental property tax deductions.

Charitable gifts

• If you don't itemize: new for 2026, you can deduct up to $1,000 ($2,000 joint) of cash gifts to qualifying charities. Gifts to donor-advised funds and supporting organizations don't qualify. IRS
• If you itemize: starting in 2026, charitable gifts generally count only to the extent they exceed 0.5% of your contribution base, which is generally your AGI. NATP

Top-bracket itemizers

From 2026, a new limit generally caps the federal tax benefit of itemized deductions at about 35 cents per dollar for taxpayers in the 37% bracket. The reduction is 2/37 of the smaller of the itemized deductions or the income above the start of the 37% bracket, using a special income measure that adds the itemized deductions back, not the final taxable income on the return. 26 U.S.C. § 68 For 2026, the 37% bracket starts above $640,600 of taxable income for single filers and $768,700 for joint filers. IRS

Families: child tax credit and dependent care

• Child tax credit: $2,200 per qualifying child under 17 at the end of 2026. Up to $1,700 per child is refundable, but the refundable part depends on earned income above $2,500, so it isn't guaranteed. The full credit applies up to $200,000 of income ($400,000 joint). You, or at least one spouse on a joint return, and each child need an SSN valid for employment, issued by the return's due date, including extensions. Rev. Proc. 2025-32 IRS: Child tax credit
• Dependent care FSA: the maximum employer dependent care exclusion rises to $7,500 ($3,750 married filing separately) for 2026. Your employer's plan has to allow the higher amount, and the expenses must qualify. 26 U.S.C. § 129
• Child and dependent care credit: from 2026 the maximum credit rate rises from 35% to 50% of qualifying expenses; the expense caps stay at $3,000 for one person and $6,000 for two or more, and the actual rate depends on income. Money excluded through a dependent care FSA reduces the expenses you can use for the credit, so the same expenses can't count twice. 26 U.S.C. § 21
• Trump Accounts: a new savings account for children, open to contributions from July 4, 2026. Contributions from individuals and employers are generally limited to a combined $5,000 a year; the federal $1,000 contribution is separate. Having an account and getting the $1,000 federal contribution are separate: the $1,000 is for U.S. citizen children born from 2025 through 2028 with a valid SSN, and you have to elect it on Form 4547, even if the Treasury opened the account automatically. IRS: Trump Accounts

IRS: Working Families Tax Cuts

Self-employed and small business

• Forms 1099-NEC and 1099-MISC: for payments made in 2026, the threshold for nonemployee compensation, rents and most other 1099-MISC payments rises from $600 to $2,000, indexed for inflation after 2026. Other thresholds don't change: royalties are still reported from $10 and gross proceeds paid to an attorney from $600. 26 U.S.C. § 6041 IRS: Instructions for Forms 1099-MISC and 1099-NEC Freelancers may receive fewer 1099s in January 2027, but every payment still has to be included in business income, whether or not a form arrives.
• Form 1099-K: for payments through apps and online marketplaces (third-party settlement organizations), federal reporting generally starts when payments exceed $20,000 and transactions exceed 200 in a year. Card payments follow different rules, and some states set lower thresholds. 26 U.S.C. § 6050W(e)
• Qualified business income deduction: the up-to-20% deduction is now permanent, and from 2026 taxpayers with at least $1,000 of qualified business income from businesses they materially participate in get a minimum deduction of $400. 26 U.S.C. § 199A
• Bonus depreciation: 100% bonus depreciation is permanent for qualified property acquired after January 19, 2025. IRS: Business provisions
• Section 179: a separate tool with its own rules. For tax year 2026, the limit is $2,560,000, reduced dollar for dollar when the cost of section 179 property placed in service exceeds $4,090,000; the deduction also can't exceed your business income. Rev. Proc. 2025-32

For California LLC owners, the state's own $800 annual tax hasn't changed; see the California LLC $800 tax.

Tax breaks that ended

If you're counting on a credit you used in earlier years, check that it still applies to 2026:

• Clean vehicle credits: the new and used electric vehicle credits aren't allowed for any vehicle acquired after September 30, 2025.
• Energy efficient home improvement credit (section 25C): not allowed for property placed in service after December 31, 2025, such as new windows, insulation or a heat pump.
• Residential clean energy credit (section 25D): not allowed for expenditures made after December 31, 2025, such as solar panels or home batteries.
• Health insurance from the Marketplace: starting in 2026, there is no cap on repaying excess advance premium tax credit. If your actual 2026 income ends up higher than you estimated, you may have to repay the full excess when you file in 2027.

IRS: Working Families Tax Cuts

What California does differently

California doesn't adopt federal tax changes automatically. Under SB 711, California law conforms to the Internal Revenue Code as of January 1, 2025, with modifications, which predates the July 2025 federal law. Assembly Revenue & Taxation Committee FTB: Summary of Federal Income Tax Changes

• Tips and overtime: existing California law doesn't conform to these deductions. A bill to adopt them for 2026 through 2028, AB 1550, was held in committee in April 2026. AB 1550 status
• Dependent care FSA: California keeps the $5,000 exclusion, so the extra federal $2,500 is taxable for California. EY, citing the Senate conformity chart
• Bonus depreciation: California doesn't conform to the federal 100% bonus depreciation. FTB Pub. 1001

The new federal deductions can create differences between your federal and California taxable income, and the California adjustments have to be worked out separately under state law. California's own legislature can still change this, so we check the rules again before the 2027 filing season.

Two examples

Simplified illustrations with assumed figures for tax year 2026. They show how the deductions reduce taxable income, not the final tax.

A single server in Sacramento

A single retiree, 68

Checklist for the 2027 filing season

• Check the SSN rules for each benefit: the tips, overtime and senior deductions need your SSN and a joint return if married; the child tax credit needs an SSN for each child and for you or at least one spouse.
• Gather tip and overtime amounts from your W-2, employer statements or your own records.
• For a car bought with a loan in 2025 or 2026: the loan statement with interest paid, the VIN and proof of U.S. final assembly.
• Keep receipts for cash gifts to charity, even if you don't itemize.
• Collect all 1099s, but also list income from clients who paid you less than $2,000 and didn't send one.
• Estimate your modified AGI early: most new deductions phase out at specific income levels.
• Plan for a separate California calculation without the new federal deductions.

We prepare 2026 returns for individuals, families and businesses; see individual tax preparation.

FAQ

When do I file my 2026 tax return?

The 2026 tax return covers income from January 1 to December 31, 2026, and is filed in early 2027. For most individuals the deadline is April 15, 2027, unless they get an extension or the deadline is moved.

How much of my tips can I deduct for 2026?

Up to $25,000 of qualified tips, reduced by $100 for each $1,000 of modified AGI above $150,000 ($300,000 joint). You need a valid SSN, married couples must file jointly, and the deduction doesn't reduce Social Security and Medicare taxes.

Does the overtime deduction cover all of my overtime pay?

No. It covers only overtime required by the federal Fair Labor Standards Act and only the amount above your regular rate, such as the extra half in time-and-a-half. The limit is $12,500, or $25,000 on a joint return.

Who gets the $6,000 senior deduction?

Each taxpayer who is 65 or older by the end of the year, with a valid SSN, gets up to $6,000 for tax years 2025 through 2028. It is reduced by 6% of modified AGI above $75,000 ($150,000 joint), and married couples must file jointly.

Do I need to itemize to claim these new deductions?

No. The tips, overtime, senior and car loan interest deductions are available whether you itemize or take the standard deduction. For 2026, non-itemizers can also deduct up to $1,000 ($2,000 joint) of cash gifts to qualifying charities.

Does California allow the tips and overtime deductions?

Not under current law. California conforms to federal law as of January 1, 2025, with modifications, and a 2026 bill to adopt the tips and overtime deductions was held in committee. Tips and overtime remain fully taxable on the California return.

Do I have to report freelance income under $2,000 if I don't get a 1099?

Yes. The $2,000 threshold only decides whether a business has to issue Form 1099-NEC for payments made in 2026. All business receipts go on your return, whether or not you receive a form, and tax is then figured on your profit after business expenses.