Who offers help with IRS repayment plans in San Diego?

San Diego Precision Tax Service helps set up and manage IRS repayment plans and tax relief options. We serve San Diego and all 50 states remotely. Start here: https://www.sandiegotaxhelp.com

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As an Enrolled Agent, we evaluate eligibility for installment agreements, penalty relief, and offers in compromise, then file and negotiate on your behalf.

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Can I hire a tax professional in San Diego for IRS issues?

Yes. You can hire San Diego Precision Tax Service (Enrolled Agent) to represent you before the IRS, prepare filings, and communicate with the IRS on your case.

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Navigating the OB3 Act: A New Deduction for Overtime Compensation

Viktoriya Barsukova, EA, MBA
Jul 29
2 min read

Updated: Jul 30

By TaxBrief / Viktoriya Barsukova, EA, MBA | July 2025 |

The One Big Beautiful Bill (OB3) Act introduced sweeping changes to the tax code, and with it, a wave of confusion across the internet. One provision receiving significant attention is the new deduction for qualified overtime compensation — a potentially valuable benefit for many taxpayers.

As with any new tax benefit, understanding the details is key to applying it correctly.

What Is the New Overtime Deduction?

The OB3 Act created IRC §225, which allows a deduction for qualified overtime compensation.

Deduction limits:
Up to $12,500 for individuals or $25,000 for joint filers.
Effect on income:
This deduction does not reduce AGI. Instead, it reduces taxable income directly. It is not an itemized deduction.
Effective for tax years beginning after December 31, 2024, and sunsets after December 31, 2028.

What Counts as “Qualified Overtime Compensation”?

Under the OB3 Act, qualified overtime compensation refers to overtime pay required under §7 of the Fair Labor Standards Act (FLSA).

Only the overtime premium (the difference between the overtime rate and regular rate) is deductible.
Tips and certain other payments under §224 are excluded.
Employers must report overtime compensation separately on Form W-2.
For 2025, the IRS may allow reasonable approximations if exact reporting isn’t available.

Income Phase-Out Rules

The deduction is phased out based on Modified Adjusted Gross Income (MAGI):

Reduced by $100 for every $1,000 over:
- $150,000 (single)
- $300,000 (joint return)

Requirements to Claim the Deduction

To qualify, the taxpayer must:

Provide a valid Social Security Number (issued before the filing deadline, including extensions).
Married taxpayers must generally file jointly to claim the deduction.

Exception: A married taxpayer may be treated as unmarried if:

They file separately,
Maintain a qualifying household for over half the year for a dependent child,
Cover more than half the household costs, and
Live apart from their spouse for the last 6 months of the year.

Saul is a single employee who earns $18/hour. In 2025, he works 27 overtime hours at $27/hour, resulting in $729 overtime pay.

His MAGI is $53,500 — well below the phase-out threshold.

The deductible amount is:

27 hours × ($27 - $18) = $243

This $243 directly reduces Saul’s taxable income, not AGI.

Final Thoughts

The OB3 Act’s overtime deduction may offer meaningful tax relief to wage earners who frequently work overtime. But accurate reporting, eligibility, and understanding of MAGI limitations are crucial for claiming it correctly.

States

California does not currently allow the OB3 Act’s overtime deduction on its state tax return. You can claim it on your federal return, but it is not deductible on your California return unless the state updates its conformity laws.
For tax year 2025 and beyond, no state currently allows this deduction at the state level, unless the state uses rolling conformity or enacts legislation to adopt the new federal provision. Future state-level changes are still possible.