OBBBA created an above-the-line deduction for overtime premium pay during a given taxable year. Qualified overtime compensation means overtime compensation paid to an individual required under Section 7 of the Fair Labor Standards Act of 1938 that is more than the regular rate (as used in such section) at which such individual is employed.
In other words, pay that is more than the regular rate at which such individual is employed, not the entire pay for overtime.
Definition of Qualified Overtime Compensation - Qualified overtime compensation is defined as the overtime compensation paid under the Fair Labor Standards Act of 1938. It must exceed the regular rate of pay as stipulated under the Act. However, it explicitly excludes any qualified tips as defined in section 224(d).
Limitation in Amount and by Modified Adjusted Gross Income (MAGI)
1. Amount Limitation: The maximum allowable deduction for any taxable year is capped at $12,500, or $25,000 in the case of a joint return.
2. MAGI-Based Limitation: The deduction amount is reduced by $100 for each $1,000 that the taxpayer's modified adjusted gross income exceeds $150,000 ($300,000 for joint returns). The MAGI is defined as the taxpayer’s adjusted gross income increased by amounts excluded from gross income under sections 911, 931, or 933.
Social Security Number (SSN) Requirements - To claim the deduction, the taxpayer must provide their social security number on the tax return. Failure to do so treats the lack of reporting as a mathematical or clerical error.
Married Individuals - The provisions stipulate that a married individual can only apply this deduction if they file a joint return with their spouse.
Provision Termination - The deduction for qualified overtime compensation is set to terminate for taxable years beginning after December 31, 2028.
Deduction Allowed to Non-Itemizers - This deduction is made available to non-itemizers, being added to the standard deduction, thereby benefiting a broader base of taxpayers.
Requirement to Include Overtime on the W-2 - Employers are required to include the total amount of qualified overtime compensation on the employee's W-2.
Payments to Persons Not Treated as Employees under the Law - For individuals not classified as employees, employers must furnish a statement to both the Secretary and the payee detailing the portion of payments that qualify as overtime compensation.
Withholding Adjustments - The Secretary of the Treasury is tasked with modifying withholding procedures starting in 2025 to accommodate for the new deduction, impacting both employers and employees.
Effective Dates - The amendments from this section are temporary and only apply for taxable years 2025 through 2028.