The IRS issued expanded guidance on August 6 for the new qualified overtime deduction. The deduction applies only to the portion of overtime compensation required under the Fair Labor Standards Act that exceeds the employee’s regular rate, generally the additional “half” in time-and-a-half pay, not the employee’s entire overtime wage. The maximum deduction is $12,500, or $25,000 on a joint return, with phaseouts beginning at modified AGI of $150,000 for single taxpayers and $300,000 for joint filers. It remains an income tax deduction, so overtime wages still count for payroll tax and withholding purposes.

One especially important practitioner point involves reporting errors. Beginning with 2026 Forms W-2, employers report qualified overtime in Box 12 using Code TT. If an employer understates qualified overtime, the employee must obtain a corrected Form W-2c before using the omitted amount to compute the deduction. The IRS says the employee cannot use Form 4852 to increase the qualified overtime amount for this purpose. Accurate employer reporting therefore becomes critical beginning with 2026 Forms W-2.