Highlights of the “No Tax on Overtime” Provision of the OBBBA
Legal Alert
- New deduction:
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- Effective for 2025 (retroactive to January 1, 2025) through 2028, a deduction is allowed for qualified overtime compensation received during the taxable year.
- “Qualified overtime compensation” is compensation “paid to an individual required under section 7 of the Fair Labor Standards Act that is in excess of the regular rate at which such individual is employed.”
- The Internal Revenue Service provided the following description regarding qualified overtime compensation:
- “individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay—such as the ‘half’ portion of ‘time-and-a-half’ compensation—that is required by the Fair Labor Standards Act (FLSA) and that is reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.” See Fact Sheet 2025-03.
- It is unclear whether the reference to pay “such as” the half portion of time-and-a-half compensation is meant to suggest that other overtime compensation could be eligible for the deduction.
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- Amount of the deduction:
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- Maximum annual deduction is $12,500 ($25,000 for joint filers).
- Presumably, if an individual has $25,000 of qualified overtime compensation, and files a joint return with a spouse who has no qualified overtime compensation, the full $25,000 deduction would be available. However, this is not stated explicitly.
- Deduction phases out for single filers with modified adjusted gross income over $150,000 ($300,000 for married filing jointly) by $100 for every $1000 of excess. For example, a single individual with modified adjusted gross income of $160,000 is entitled to a maximum deduction of $11,500.
- Maximum annual deduction is $12,500 ($25,000 for joint filers).
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- Taxpayer eligibility:
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- Deduction is available for both itemizing and non-itemizing taxpayers.
- To claim the deduction, the taxpayer must:
- include the taxpayer’s Social Security Number on the return, and
- file jointly if married.
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- Reporting:
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- Employers and other payors are required to file information returns (Forms W-2 or 1099, or other specified statement) with the Internal Revenue Service (or Social Security Administration) and furnish statements to taxpayers showing the total amount of qualified overtime compensation paid during the year.
- Qualified overtime compensation must be stated separately from regular wages.
- For 2025, a transition rule provides that the employer/payor “may approximate a separate accounting of amounts designated as qualified overtime compensation by any reasonable method specified by the Secretary.”
- The Internal Revenue Service has referred to this as “transition relief,” so it appears that the aim is to provide some leniency to reporting methods used for 2025 statements and returns. Employers and other payors will need to make reasonable efforts to ensure that qualified overtime compensation is reported accurately.
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- Guidance:
- The Internal Revenue Service has announced that it will provide further guidance to taxpayers eligible to claim the deduction, and to employers/payors subject to the new reporting requirements.
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