A new tax break for overtime work is so complicated the IRS is turning to the Labor Department to help administer it.
A much-touted deduction for auto-loan interest comes with a thicket of stipulations, including that a vehicle had its “final assembly” in the U.S.
And some people taking a new break for tips could find it triggers a separate tax bill that could leave them worse off.
Republicans are counting on those benefits from their new tax law to drive up refunds this year, hoping they'll be rewarded at the ballot box in November. But unlike familiar and relatively easy-to-understand breaks like the Child Tax Credit, President Donald Trump’s new provisions come with fine print that could frustrate taxpayers.
They aren’t as generous as Trump’s “no tax on tips” and “no tax on overtime” taglines suggest, and have complex rules that will prevent many from claiming them altogether.
“They are much more complicated than what your ordinary middle-class household is used to dealing with,” said Kyle Pomerleau, a senior fellow at the conservative-leaning American Enterprise Institute.
That could potentially dampen the enthusiasm Republicans hope to generate for their signature tax cuts. They’ve been eagerly awaiting tax season, anticipating that a gusher of tax refunds will help sell the public on their biggest legislative achievement of the Trump administration.
It’s a somewhat unusual stance for Republicans who in past years typically saw tax time as an opportunity to stoke anger about the tax system, by emphasizing the financial burden of taxes and the difficulty of filing.
But they engineered last year’s tax cuts so people would see immediate benefits, by making a long list of breaks available retroactively to January of last year.
Not just that.
They also skipped the usual task of changing how taxes are withheld from people’s paychecks so that, instead of taxpayers receiving more last year, in the wake of passage of the cuts, they’ll now see a larger, all-at-once benefit.
Experts agree total payment should go up this year by somewhere in the neighborhood of $100 billion. The administration estimates the average refund will increase by $1,000, though payments will vary widely by taxpayer. Last year, the average refund was $3,250.
It’s hardly a sure thing that bigger refunds will pay off for Republicans.
They never got much credit from voters for their 2017 tax cuts, with polls at the time showing many people didn’t believe their taxes had gone down, even if they had. Surveys have long shown the public tends to overestimate how much they pay in taxes.
In a statement, a Treasury spokesperson said the agency is “confident in the ability of pro-worker deductions like no tax on tips, no tax on overtime and auto loan deductions to help drive one of the most successful filing seasons ever.”
Some of the new benefits are expanded versions of oldies-but-goodies that will be familiar to many. The popular Child Tax Credit increased to $2,200 per kid from $2,000. A long-standing deduction for state and local taxes jumped to $40,000 from $10,000.
And there’s a new, simple $6,000 per person deduction for seniors.
But some of the new Trump breaks, which are projected to account for a big share of coming refunds, will be tough to navigate — particularly the deduction for overtime pay, which maxes out at $25,000.
“It’s mind-boggling,” says Allan Reynolds, a longtime tax preparer. “The overtime is where the issues will arise.”
Only some people will be able to claim the break, depending on whether they’re covered by a 1938 law called the Fair Labor Standards Act. Most will be eligible. For some, eligibility will turn on the specifics of their collective-bargaining agreements at work, says Reynolds.
The IRS has warned the provision could be difficult to interpret — including for the agency itself.
“We are not, as IRS attorneys, experts in the Fair Labor Standards Act so we are working on ways to point taxpayers to resources put out by the Department of Labor to help them make determinations in more complicated situations,” said Lynne Camillo, an IRS lawyer, speaking at a recent tax conference sponsored by the DC Bar.
Even if people qualify, the rules about which overtime can be claimed are not straightforward.
The provision assumes people are paid time-and-a-half, and only that extra “half” can be claimed, even if they were paid more than that, and also only in weeks in which they worked more than 40 hours.
Take someone who normally makes $30 an hour for an eight-hour shift and works an hour of overtime at time-and-a-half. They'd earn $45 for that extra hour, but they'd only get to deduct the additional $15 they made, not their usual $30 rate, and only as long as they worked more than 40 hours that week.
And some employers may not provide much help to workers to figure out how much eligible overtime they have.
Since the tax changes were signed into law last July, when half the year was already over, businesses complained it would be too hard for them to retroactively calculate the amount of overtime that qualified for the tax break. So the Treasury Department temporarily waived a requirement that companies report it to employees, though the government is still encouraging them to do so voluntarily.
That will shift the burden onto individual taxpayers who may have to figure it out from pay stubs and other documents.
“The guidance was really favorable to companies in a way that’s a little bit detrimental to individuals because employers are not required to do any reporting at all,” said Dustin Stamper, a managing director at the consulting firm BDO.
“That may make employees scramble to figure out what the number is.”
The IRS is trying to make it easy by giving examples of how taxpayers might calculate it. Workers must make a “reasonable effort” to substantiate their deduction, the department says, though it’s an open question how aggressively it would pursue people claiming it improperly.
The administration has tried to smooth the edges of other provisions too.
The new tip deduction is supposed to be reserved for those in occupations where tipping is customary, and Treasury has taken an expansive view of who is eligible. It produced a list of more than 60 categories of people who are eligible, including not only bartenders, cab drivers and valets, but also electricians, locksmiths and chimney sweeps.
And it has temporarily waived rules barring people in certain industries like performing arts and health-related fields from claiming it.
But many tips currently go unreported to the IRS — almost half, according to one agency study. And if people try to claim previously unreported tips, they will owe Social Security and Medicare taxes on this, which could potentially wipe out their savings from the new deduction.
The administration is also trying to make it easy to claim a new break for auto-loan interest by making clear it’s not going to give people a hard time about satisfying a requirement that the vehicles are mostly for personal use — people can just declare that and that’s the end of it.
But there are other rules that will prevent many from benefiting from the provision.
It’s only for new cars, and only for ones purchased after Dec. 31, 2024. Only vehicles that had “final assembly” at a manufacturing facility in the U.S. are eligible, which the IRS says people can determine by entering the vehicle identification number into a decoder set up by the National Highway Traffic Safety Administration.
About 60 percent of cars sold in the U.S. had their final assembly here, the IRS says.
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