A recent change to the tax code means that some taxpayers may be able to take a deduction on qualified overtime compensation. The deduction covers the amount above and beyond a taxpayer's normal rate of pay.

Taxpayers can deduct up to $12,500, or $25,000 if filing jointly, for qualified overtime pay. The deduction begins to phase out at $150,000, or $300,000 if filing jointly.

Other requirements include:

• Taxpayers must have a Social Security number to qualify for this deduction.
• They must be covered by the Fair Labor Standards Act (FLSA) and not exempt from the FLSA's overtime requirement.
  • If a taxpayer doesn't qualify for overtime under the FLSA, they cannot claim the exemption even if their employment contract or other circumstances allow them to collect overtime pay.
• If married, they must file jointly.
• If a taxpayer otherwise qualifies for the deduction, it doesn't matter if they take the standard deduction or itemize their deductions.
• Taxpayers can only deduct what is required by the FLSA and in excess of the regular rate.
• If taxpayers don't receive a statement that itemizes qualified overtime compensation, they will have to calculate that amount. Schedule 1-A includes instructions on how to calculate the amount.

Understanding the Qualified Overtime Deduction

A taxpayer is single and has a normal hourly rate of $40 an hour. They have a social security number. They do fall under the FLSA.

Their company pays double for overtime, meaning the taxpayer makes $80 an hour whenever they work more than forty hours in a week. The FLSA only requires employers to pay overtime at a rate of one-and-a-half times an employee's normal salary, which is $60.

During the year, the taxpayer works 100 hours of overtime. This works out to $8,000 in overtime pay, but the taxpayer can only deduct $2,000. This is because the taxpayer can only use the one-and-a-half times overtime rate, which is $60. They must deduct their regular salary from that amount, which comes out to $20 an hour for overtime pay that qualifies for the deduction.

One of the taxpayer's coworkers earns the same hourly rate and is married. The coworker and their spouse earn a combined $240,000 a year, meaning the coworker could claim the full deduction. However, the coworker doesn't file jointly, meaning they cannot qualify for the overtime deduction.

Get Help From an Experienced IRS Tax Attorney

If you have questions about the qualified overtime deduction law or other changes to the tax code, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.