The One Big Beautiful Bill Act (OBBBA) created a new, federal overtime tax deduction that non-exempt employees can claim on their federal tax returns. Please see LCW’s blog post describing the OBBBA’s deduction of qualified overtime compensation here and blog post describing the IRS notices on the deduction located here.
The OBBBA does not provide a deduction on all qualified overtime premiums for every non-exempt employee; it is subject to caps and limitations. Non-Exempt employees should understand the two types of limitations on the deduction amount. First, the OBBBA caps the amount of the qualified overtime deduction at $12,500 ($25,000 for joint filers). Second, the OBBBA further limits the amount of the deduction if the non-exempt employee’s modified adjusted gross income (MAGI) is over $150,000 ($300,000 for joint filers). The deduction is phased out by $100 for every $1,000 of MAGI above $150,000 ($300,000 for joint filers).
For example, a non-exempt employee who is a single filer with a MAGI of $140,000 is subject to a deduction cap of $12,500. This means that the highest qualified overtime compensation deduction this employee can receive is $12,500.
In comparison, a non-exempt employee who is a single filer with a MAGI of $170,000 makes $20,000 more than the $150,000 MAGI threshold. $20,000 divided by $1,000 equals 20. For each set of $1,000 above the $150,000 MAGI, the deduction is lowered by $100. As a result, the deduction cap is lowered by $2,000 ($100 x 20). This employee’s deduction cap is $10,500 ($12,500 initial cap – $2,000 phase out amount). This means that the highest qualified overtime compensation deduction this employee can receive is $10,500.
Employers are not responsible for calculating or advising employees on the exact deduction cap that applies to the individual employee. It is ultimately up to the non-exempt employee (and their tax preparer) to determine the applicable cap.