Where Tip and Overtime Deductions Phase Out on Schedule 1-A at $150K MAGI — 1A Calculation

Where Schedule 1-A Fits in the 1040 Form

Schedule 1-A is a new tax form introduced under the One Big Beautiful Bill Act that provides above-the-line deductions for the 2025 tax year, and the schedule 1a magi phase out calculation determines how much of those deductions you can actually claim based on your modified adjusted gross income.¹ For freelancers earning above $150,000, understanding this calculation is essential because both the tip and overtime deductions begin to phase out at that threshold, reducing dollar-for-dollar as income rises.

Schedule 1-A sits on page 2 of Form 1040, directly after Schedule 1 (Additional Income and Adjustments to Income). While Schedule 1 reports income items like business profit and adjustments like the self-employed health insurance deduction, Schedule 1-A captures four new above-the-line deductions: qualified tip income, qualified overtime compensation, qualified motor vehicle interest, and the senior saver credit.¹

The form flows sequentially. You first calculate your total income and adjustments on Schedule 1, which produces your adjusted gross income. That AGI number then feeds into Schedule 1-A, where the phase-out calculations apply. If your MAGI exceeds $150,000 as a single filer, the deductions shrink proportionally before reaching your final taxable income line.

For freelancers, this placement matters because above-the-line deductions reduce AGI directly, lowering both income tax and self-employment tax. Missing the phase-out calculation means overstating deductions and underpaying estimated taxes, which triggers underpayment penalties.

What Is Schedule 1-A and Why It Matters at $150K MAGI

The schedule 1a magi phase out calculation applies to four new deductions authorized under the One Big Beautiful Bill Act for the 2025 tax year, filed in the 2026 filing season.² The draft form was released in January 2025, and all four deductions share a common feature: they phase out based on MAGI.³

The $150,000 threshold applies to single filers for both the tip deduction and the overtime deduction. For married filing jointly, the tip deduction phases out starting at $150,000 but disappears completely at $400,000, while the overtime deduction begins phasing out at $300,000.⁴ The phase-out rate is $100 of deduction reduction for every $1,000 of MAGI above the threshold.⁴

Consider a hypothetical freelance consultant earning $165,000 in MAGI. That is $15,000 over the $150,000 threshold. At $100 per $1,000, the deduction reduces by $1,500. If the consultant had $25,000 in qualified tip income, the maximum deduction drops to $23,500.⁵ The same math applies to the overtime deduction, though the maximum is capped at $12,500.⁵

How Tip Income Phase Out Works Above the Threshold

The tip deduction allows up to $25,000 in qualified tip income through 2028, phasing out completely at $200,000 MAGI for single filers and $400,000 for married filing jointly.⁴ The phase-out begins at $150,000 MAGI, meaning the deduction window spans $50,000 of income for single filers.

The calculation is straightforward. Take your MAGI, subtract $150,000, divide by $1,000, and multiply by $100. That is the reduction amount. Subtract that from the maximum $25,000 deduction to get your allowable amount.

For example, suppose a freelance photographer earns $175,000 in MAGI. The excess over $150,000 is $25,000. Divided by $1,000 gives 25. Multiplied by $100 gives a $2,500 reduction. The allowable tip deduction is $22,500⁵. At $200,000 MAGI, the reduction hits $5,000⁵, and the deduction reaches zero.

For married joint filers, the phase-out runs from $150,000 to $400,000, a $250,000 range. A married freelancer earning $300,000 MAGI would see a $15,000 reduction, leaving a $10,000 tip deduction.

Overtime Deductions and the MAGI Phase Out Trigger

The overtime deduction covers 100% of qualified overtime compensation up to $12,500 annually, but only for employers with a written overtime policy.⁵ For self-employed freelancers, this applies to overtime wages paid to employees, not to the freelancer's own income.

The phase-out begins at $150,000 MAGI for single filers and $300,000 for married filing jointly.⁵ The same $100 per $1,000 reduction applies. For example, at $160,000 MAGI single, the $12,500 maximum drops by $1,000 to $11,500. At $175,000, the reduction is $2,500, leaving a $10,000 deduction.

For freelancers who employ W-2 workers, tracking overtime hours separately is critical. The deduction requires a written overtime policy, and the qualified overtime must be documented. Without the policy, no deduction applies regardless of MAGI.

Consider a hypothetical freelance marketing agency owner with two employees earning overtime. The owner's MAGI is, for example, $185,000. The excess over $150,000 is $35,000, producing a $3,500 reduction. If the qualified overtime paid was, say, $12,500, the allowable deduction is $9,000.

Calculating Your Phase Out Amount on Schedule 1-A

The phase-out calculation follows a consistent formula across all four Schedule 1-A deductions. Below is a reference table showing deduction amounts at various MAGI levels for a single filer claiming the maximum tip deduction.

For the overtime deduction, the same formula applies with a $12,500 maximum.

The key takeaway is that MAGI calculation must happen first. Without knowing your MAGI, you cannot determine which deductions apply or by how much they reduce.

Strategies to Stay Below the $150K MAGI Limit

Freelancers near the $150,000 threshold have several options to reduce MAGI and preserve full deductions. Retirement plan contributions are the most effective tool. A SEP IRA allows contributions up to 25% of net self-employment income, capped at $69,000 for 2025⁵. A solo 401(k) allows both employee deferrals and employer profit-sharing contributions.

Health insurance premiums for self-employed individuals are deductible above the line on Schedule 1, reducing AGI before the Schedule 1-A calculation. For a freelancer earning $155,000, a $5,000 health insurance deduction brings MAGI to $150,000, preserving the full tip and overtime deductions.

Business expenses also reduce net income before MAGI. Accelerating equipment purchases under Section 179, prepaying business insurance, or increasing retirement contributions before December 31 all lower MAGI. For freelancers with variable income, timing invoices to push revenue into the following tax year can keep MAGI under the threshold.

A hypothetical freelance writer earning $148,000 with a $10,000 bonus invoiced in December could delay the invoice to January, keeping MAGI at $148,000 and preserving full deductions.

Common Mistakes Freelancers Make With Phase Out Calculations

The most frequent error is calculating the phase-out on gross income rather than MAGI. Gross income includes all revenue before deductions, while MAGI subtracts adjustments like retirement contributions, health insurance, and half of self-employment tax. A freelancer earning $160,000 gross might have a MAGI of $148,000 after adjustments, meaning no phase-out applies.

Another mistake is applying the phase-out to the wrong deduction. The tip deduction phases out completely at $200,000 single, while the overtime deduction phases out at a different rate. Mixing the two thresholds produces incorrect tax liability projections.

Freelancers also forget that the phase-out applies to each deduction independently. If you claim both the tip deduction and the overtime deduction, each one reduces separately based on the same MAGI. The reduction is not shared or allocated across deductions.

A third error is failing to document the written overtime policy. Without a written policy in place before the overtime is worked, the overtime deduction is disallowed entirely, regardless of MAGI.

Your Next Step

Calculate your projected 2025 MAGI using your current year-to-date income and estimated year-end revenue. Subtract all above-the-line adjustments including SEP IRA contributions, health insurance premiums, and business expenses. If the result exceeds $150,000, run the phase-out formula for each Schedule 1-A deduction you plan to claim. Adjust your quarterly estimated tax payments accordingly to avoid underpayment penalties. PreFileCheck's deduction calculator can run this math automatically with your income inputs.