Dept. of Labor FLSA Ruling and New Overtime Deduction

The OBBBA added IRC §225 allowing a deduction of up to $12,500 ($25,000 if MFJ) for qualified overtime compensation. This pay is defined as paid under the Fair Labor Standards Act (FLSA) in excess of "regular pay". Only the excess is overtime and generally overtime is paid when an eligible worker works over 40 hours per week.

Some of the examples offered by the IRS in FS-2026-01 and Notice 2025-69 focus on a regular hourly pay rate such as $20 per hour and the overtime rate as 1.5 times that amount or $30 per hour with $10/hour constituting overtime pay.

But as illustrated in Department of Labor Ruling FLSA 2026-02 (1/5/26), regular pay might be an hourly rate increased by nondiscretionary pay. In this ruling, workers were paid $12/hour and qualified for overtime pay if they worked over 40 hours per week. The workers could earn additional compensation under a Safety, Job Duties, and Performance bonus plan. Under the FLSA, this is not a discretionary plan because terms are set out in a predetermined plan, which makes this bonus pay part of regular pay.

In the fact pattern, workers received $9.50/hour of nondiscretionary bonus pay making their regular pay rate $21.50/hour and overtime pay at 1.5 times regular pay or $32.25/hour.

Thus, under IRC §225(c), the qualified overtime compensation is $10.75/hour ($32.25 less $21.50). 

Note that if the worker or employer incorrectly assumes that regular pay is $12/hour, they would treat $20.25/hour as overtime compensation generating a deduction which would be too high ($32.25 less $12.00).

In weeks where there is no nondiscretionary bonus paid, the overtime pay amount will be different. Thus, employers need good records to be able to properly prepare Form W-2 for 2026 through 2028.

For 2025, employers were not required to, but were encouraged to let workers know their amount of qualified overtime included in their wages. For 2026 through 2028, employers must separately state the qualified overtime on the Form W-2. Without information from their employer for 2025, will workers be able to determine the correct amount of overtime pay?

Notice 2025-69 does mention regular pay increased by a nondiscretionary bonus but no further details or example are provided (see page 24).

This is a good example of complexity that can arise in using a non-tax law to define a tax term, and when the measure of overtime pay can vary from pay period to pay period.

What do you think?

Time Running Out To Claim Refunds Owed for 2022 - WHY?

Every year in mid-March, the IRS issues a news release about time running out to claim refunds owed to people for four year earlier where the statute of limitations is going to close on April 15. The latest is IR-2026-37 (3/20/26) stating that time is running out to claim $1.2 billion in refunds for 2022. The IRS has details on this to not only reach this figure, but they also have a table showing the refunds owed by state. 

I have blogged on this a few times before including in 2023 suggesting that a modern system should prevent this situation. For example, why not change the law to allow the IRS to issue the refund?  Some of these refunds likely are for people with wage withholding who did not know they had to file to get their withheld federal income taxes refunded when their income is below the filing threshold.

Some people who have not filed are also missing out on claiming a greater refund such as for the Earned Income Tax Credit.

Please see my March 2023 post for a few ideas on how to not have these refunds not get to the taxpayers they are owed to.

What do you think?

Tax Scams Continue to Grow; IRS Simplifies Reporting of Scams

https://www.irs.gov/pub/irs-pdf/p6138.pdf

In February, the IRS announced a new online reporting tool for suspected tax fraud, scams, and illegal activities. Smartly, the link is on the main page (in the dark blue line):

This month, the IRS released the 2026 Dirty Dozen list of various scams to watch out for, such as fake charities seeking your money, phishing to get you to click on links that enable the scammer to get information from you, AI-enabled robocalls impersonating an IRS employee, misleading tax advice on social media, and more.

For a list of the dirty dozen since the IRS started this in 2001, please visit my table. You'll see that a few have disappeared but most continue or have morphed into digital scams.

The IRS also created two nice posters (pubs) with a QR code to encourage people to report scams. I think that while the IRS or other law enforcement agencies might not find your scammer, with more information, they do find some and can alert the public to new scams and ways to avoid them.  These pubs are 6138 and 6139.

Something that has also changed is getting emails that clearly look suspect such as because they are poorly written with grammar and spelling errors. Well, scammers likely are using AI to write more grammatically correct, enticing looking emails and texts - we all need to be extra cautious.  When in doubt, don't click but instead find another way to verify if the information is valid, such as logging into the online account they are talking about (using your usual link rather than the one in the email), such as your IRS online account (or one I get frequently is that my Amazon account has been suspended (!) when it has not).

What do you think?  What more can be done to help people from being the victim of identity theft or falling for a tax scam such as claiming a bogus tax credit or giving money to scammers pretending to be the IRS or a state tax agency?

Minnesota Examines Tax Expenditures

Tax expenditures are special rules in a tax system that are not part of a "normal" tax. For example, special deductions, exclusions and credits in our Federal Tax system generally are tax expenditures. This includes the exclusion for employer-provided health insurance (the largest tax expenditure at $296 billion costs per year per the Treasury Department), step-up in basis at date of death ($40 billion per year per Treasury), mortgage interest expense, tip and overtime deductions, and vehicle loan interest deduction.

The federal income tax has over 100 special rules. States typically have more, particularly in their sales tax system that usually has numerous exemptions.  And many items of personal consumption that states do not tax do not get measured or identified as tax expenditures because they are not part of the state's statutory definition of the tax base. For example, California's sales tax applies to tangible personal property. So the fact that California doesn't impose sales tax on digital goods as textbooks and iTunes, isn't measured - which also masts who is getting tax savings.

Well, in 2021, Minnesota created the Tax Expenditure Review Commission consisting of legislators and the commissioner of revenue. They meet to evaluate the effectiveness of their state tax system's 327 special tax rules (tax expenditures). Apparently this past year they looked at 15 of these and made recommendations on their effectiveness and determined if changes were warranted. That is better than not looking at all, but out of 327, more seems needed.

But I applaud the lawmakers in Minnesota for creating the commission because tax expenditures result in lower revenue, and higher tax rates than would otherwise be needed without the special tax rules. They are spending that is easily overlooked in the state budget because only direct spending (sending money directly to an individual or business) is noted, not the spending this is done by lawmakers lowering your tax liability.

What do you think?

Should All Gains on Home Sales Be Tax Free?

Since 1997, a significant tax break is the ability to exclude up to $250,000 of gain on sale of your principal residence if used 2 years of the 5 years prior to sale ($500,000 gain exclusion if married filing jointly and both spouses meet the 2 years of use requirement). This exclusion can be used every two years.

In December 2025, the U.S. Census Bureau reported that the median home price in the U.S. is $414,400. That sure makes a $500,000 gain exclusion seem like a big number.

Of course, there are a few parts of the country, such as San Jose, where people may easily have over $500,000 of gain upon sale of their residence.  In that case, if married, they exclude $500,000 (saving taxes possibly of up to 18.3% or 23.8% on that excluded gain).  Let's say the gain is $600,000 and they are in a 20% capital gain bracket + likely owe the 3.8% NIIT. They will have to pay $23,800 of capital gain tax on the $100,000 taxable gain.  That sounds like a great deal given they had $600,000 of income!  If that had instead been wages, stock gain or gain from sale of real property that was not their residence, it would all be taxable.

There are a few bills in the 119th Congress that would exclude all of the gain on sale of a principal residence, such as H.R. ____, Don't Tax the American Dream Act. Per sponsor Rep. Goldman, this would increase the national housing supply and repeal "costly taxes" on homeowners. He also notes that the $250,000 and $500,000 amounts have not been adjusted for inflation since 1997. Similarly see H.R. ___, Middle Class Home Tax Elimination Act. Sponsor Rep. Fitzgerald also notes that the Section 121 dollar amounts have remained constant since 1997.

I don't think the lack of inflation adjustment justifies this possible tax change because the exclusion amounts were already quite high in 1997 - particularly given that 29 years later the median home price is roughly $414,000 (making a $500,000 gain impossible).  The relatively few people who will benefit from allowing any amount of gain to be excluded is much smaller than the number of individuals who would benefit from adding an inflation factor to other rules that lack them, such as the child care credit ($3,000 for 1 child and $6,000 for 2 or more children at this dollar amounts for over 20 years) and the taxation of Social Security benefits (dollar amounts set over 30 years ago).

And why no limit at all for the proposals that allow all of the home gain to be excluded.  This is a tremendous benefit to those with very high value homes that have far more appreciation than lower value homes.  Do a search for example, for movie and music stars who have sold homes for millions of dollars of gain - why should that all be tax free?  (here is one example I found - perhaps $46 million of gain in 2021 (although there may have been improvements made in the 25 years of ownership reducing that gain) - but still a multimillion dollar gain  - story here).

So, why not keep the high exclusions where they are now and use the savings from not increasing them for a small number of individuals and instead use those dollars to either keep our deficits lower or to add inflation adjustments to provisions that would benefit many more taxpayers, such as people paying for child care so they can work.  I'm not sure where you find child care today for $3,000 per year for one child (note that OBBBA increased the rate of this credit, but not the decades old dollar amounts).

What do you think?