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?

Trump Accounts - Interesting Idea

https://www.trumpaccounts.gov/ 

The OBBBA created yet one more savings vehicle for parents and other relatives of children under age 18 to consider. While the new provisions are lengthy and a bit complicated, a good deal of understandable information is being pushed out by Treasury/IRS (such as https://www.trumpaccounts.gov/) and it is an interesting savings vehicle worth looking into.

New Section 530A basically allows new accounts that operate much like a traditional IRA only they are for kids under age 18 and have restrictions on what they can invest in. Up to $5,000 can be contributed to the account annually (this amount is adjusted for inflation starting in 2028) until the year of the child's 17th birthday. Of this amount, up to $2,500 can be contributed by an employer (per employee per year rather than per employee Trump Account) if the employer creates this employee benefit, written, per guidance to be issued by the IRS. The $2,500 is tax free to the employee (Section 128).

For a baby born in 2025 through 2028, the government will put $1,000 into the account if the baby is a US citizen and has an SSN and the parent or other relative makes the election. This doesn't count towards the maximum $5,000 contribution per year. The $1,000 is treated as a tax refund so not taxable. 

No distributions are allowed until the year the child turns 18 but the goal is for the child to learn about future value, savings and perhaps a bit about taxes, and let the money continue to grow. The child can start contributing via IRA rules once working and keeping the account. If disciplined, to keep the account and not pull it out for a new car or big party, the account could grow tremendously. For example, parents starting one in 2026 (contributions can't start until 7/4/26) for their 3-year old child, contributing $5,000 per year until age 17 (15 contributions), assuming a 5% rate of return will have almost $108,000 at that time. If no further contributions, when the child is 60, the balance would be about $837,000.

You need to track basis in the account and if a state doesn't conform, also track state tax basis in the account. If would be a lot simpler if states conform.
For more information:

• Website where apparently by July 2026 you can elect to set up an account - https://www.trumpaccounts.gov/

• Form 4547, Trump Account Election(s)

• Notice 2025-68

I offer a few suggestions to make these accounts more enticing and protected:

1. Add a provision similar to Section 529(c)(2)(A)(i) that contributions to the account on behalf of any designated beneficiary is treated as a completed gift to that beneficiary which is NOT a future interest in property to make it clear that the gift can be exempt from reporting and gift tax under the $19,000 annual gift exclusion.

2. Encourage contributions and people not forgetting about the accounts by allowing tax refunds to be directed to the account(s).

3. Rather than have parents or someone elect to set up an account for an eligible baby born in 2025 through 2028, set it up automatically when the parents apply for an SSN for the baby, and sent information to the parents about the account and encourage them to continue to add funds as they can and set them up for eligible siblings too if possible.

4. Add more than a 10% withdrawal penalty to discourage 18-year-olds from emptying the account at age 18 or soon thereafter.  Provide an incentive to encourage them to convert the account to a traditional IRA and continue making contributions; the incentive might be another $1,000 into the account at age 21.

5. Encourage states to conform to the OBBBA Trump Account provisions to simplify tracking basis in the account and for conformity on annual tax effects.

6. Require trustees to make contact with beneficiaries (and parents until beneficiaries turn 18) because it is possible beneficiaries will forget about the account and the trustee will end up sending it to the state as unclaimed property at some point in the future. This regular contact would ideally include some financial literacy tips.

What do you think?

Challenges with Tip Income Deduction, Particularly for 2025

I've blogged already on the inequities of the tip income deduction (9/10/25 post).  It also has some recordkeeping and compliance challenges for employers and employees, and payors and contractors. These challenges will be greater for 2025 because tipped workers won't have their qualified tips separately reported on their W-2, or 1099-NEC or 1099-K. That won't happen until 2026.

Recently, the IRS provided relief to employers and 1099 filers for 2025 because otherwise they could face penalties for not reporting the qualified tips. The IRS does encourage employers and others to find some way to get information to employees on their qualified tip amount and occupation code, such as via a written statement or online portal (see IR-2025-110 and Notice 2025-62).

Now you might think, don't tipped workers know how much their tip income is?  Well, they might, but do they know what their "qualified" tip amount was?  They are not the same thing!

For example, the following are tips, but not qualified tips that will generate a deduction for the worker.

• Tip received by a waiter at a restaurant but it was automatically added to the bill such as because it was a party of 6. This is not voluntarily paid so is not a qualified tip, even if the restaurant gave it to the waiter.
• The employee works for an employer who is a "specified service trade or business" (SSTB), such as theater or other performing arts business. This might also be confusing for employees with multiple jobs. For example, the bartender employee at the restaurant gets qualified tips (if paid voluntarily), but when she works at the performing arts center as an employee, those tips are not qualified.
• The worker might not be in one of the many listed occupations per a table in the proposed regulations (§1.224-1 at REG–11003225 (9/22/25)). The IRS says it will have the lists at this website, but it is not operational at 11/15/25 - https://www.irs.gov/TippedOccupations. 
• The tipped worker is an independent contractor such as a gardener without a 1099. Their tips are only qualified if they are reported on a Form 1099-NEC or 1099-MISC or 1099-K. If the gardener works for households and gets paid in cash, they won't get a 1099.  If they do work for businesses, they will get a 1099-NEC for 2025 if paid $600 or more. I'm assuming the contractor reports all income including the tips.  As soon as they can, contractors who don't get a 1099, such as because paid in cash by households, they should start taking credit or debit card or PayPal or Venmo so they will get a 1099-K.  We still don't know how PayPal and Venmo will get the tip info, likely they will be required to have the payor specify these amounts.

There is a lot of work here, particularly for the issuers of the W-2 and 1099s.  For example, one example in the proposed regulations is a restaurant where the point of sale machine only offers 3 options on tips:15%, 18% and 20%.  Since there is not an option to put in your own number including zero, this is not voluntary. BUT, since 15% is the minimum in this scenario, if someone tips 18% or 20%, that differential is a qualified tip!  Of course, the restaurant or other establishment with this fact pattern will need to have its recordkeeping system set up to capture this.

Payors will definitely want to get recordkeeping systems ready very soon to be ready to report qualified tips on reporting forms. They might also want to see about changing customer billing arrangements to ease compliance, by, for example, making all tip amounts voluntary.

What do you think?

OBBBA Includes 2 Marriage Penalties, 1 Neutral, and 1 Marriage Bonus

A marriage penalty exists in the tax system where, all things being the same, the taxes of two single individuals goes up when they get married. A marriage bonus occurs when combined tax liability goes down when two single people marry. And some provisions result in no change. Generally a couple will face a combination of marriage penalty and status quo provisions, but rarely a bonus provision - except under a new temporary OBBBA deduction but likely less than 15% of workers qualify for it (see below). In my examples, I'm assuming the individuals have identical tax situations and consider what happens if they marry. Thus, I'm looking at marriage penalty and bonus built into the tax law rather than built into facts, such as where a low-income individual marries a higher income individuals causing the higher income individual to drop to a lower tax bracket.

Examples of marriage penalty rules including two OBBBA items:

• Where the top 37% income tax bracket starts. At the brackets below this, the MFJ amounts are double the single rates. But at 37% - a rate that applies to less than 1% of individuals, the 37% rate starts at taxable income of $751,601 for MFJ and $626,351.
• The net investment income tax (NIIT) threshold for married is $250,000 and $200,000 for single.
• The maximum mortgage amount for an interest deduction is $750,000 if MFJ or single ($375,000 if MFS).
• The state and local income tax (SALT) cap which for 2018 through 2024 was $10,000 for both MFJ and single ($5,000 for MFS). This penalty remains after OBBBA but at a higher cap of $40,000 for 2025, subject to a phasedown starting at modified AGI of $500,001.
• OBBBA tip income deduction is $25,000 max whether married or single (generally $0 if MFS).
• OBBBA car loan interest deduction is $10,000 whether married or single (however most people won't have even close to $10,000 of interest expense which equates to a loan of about $160,000).

Examples of provisions with no change for marital status (including one OBBBA item):

• Individual tax rates and brackets at the 10, 12, 22, 24, 32 and 35% levels.
• The standard deduction for MFJ is double the single deduction.
• The gain exclusion for selling your principal residence is $250,000 if single and $500,000 if MFJ.
• OBBBA senior deduction is $6,000 per eligible senior (but $0 if MFS).

Examples of provisions with a bonus (I'm just aware of one and it is from OBBBA):

• OBBBA overtime income deduction - $12,500 if single, $25,000 if MFJ (generally $0 if MFS). This new deduction (Section 225) is not $12,500 per spouse. So, assuming that the married couple is below the phaseout level, if one spouse has overtime of $25,000 and the other has none, they get a $25,000 overtime income deduction. If that worker with the $25,000 overtime was instead single, they would only get a deduction of $12,500.

I can't think of other marriage bonus situations in the tax law.  If you know of others, please post them in the comments - thank you!

So, why was the OBBBA deduction for overtime income written differently for married couples than the tip income deduction? Drafting error? Purposeful?

What do you think?  Also see my chart below for a summary of four new OBBBA rules and relevance of marital status.

What Happened to the House OBBBA Provision on P.L. 86-272?

Over the years there have been various proposals to modify P.L. 86-272 enacted in 1959, to address income tax nexus for companies that only sell tangible personal property. Proposals usually call for expanding the application of this rule beyond sellers of tangible personal property and perhaps to taxes other than income taxes. See, for example, H.R. 3063, Business Activity Tax Simplification Act of 2019 (116th Congress).

The key premise of P.L. 86-272 is that a state may not impose income tax obligations on a company selling tangible personal property if the only activity in the state is solicitation of orders that are approved and shipped from outside of the state. The public law doesn't define solicitation of orders.

There was recent activity, including a provision in the House passed version of the OBBBA, to modify P.L 86-272. But it was not included in the Senate version of the bill or the final bill.  Will it return in another tax bill or standalone legislation? Perhaps.

H.R. 427 in the 119th Congress includes this House OBBBA provision. The change involves adding a definition of "solicitation of orders" that is broader than defined by the U.S. Supreme Court since 1992 when the decided Wisconsin Dep't of Revenue v William Wrigley, Jr., Co., 505 US 214. Here is the additional term proposed to be added to P.L. 86-272:

Likely the proposal ties to a new interpretation of P.L. 86-272 by the Multistate Tax Commission in 2021 to consider our digital era that did not exist when this law was enacted in 1959. It might also be aiming to provide greater clarify per recent court cases such as Uline, Inc. v. CIR Minnesota, No. 9435-R (Tax Court, 6/23/23). In this case, sales reps prepared some sales notes and market news notes and helped with a few product returns. This market research was found to be beyond mere solicitation of orders. There were some other activities going on including job fairs in MN.

Query: Why was this multistate provision in the House OBBBA bill but not in the Senate or final bill? Possibly it was dropped since it doesn't directly involve federal revenues so did not meet the requirements for a budget reconciliation bill.

Should this change make its way into another federal bill this year?

What do you think?

OBBBA H.R. 1 - Some Track Changes and Commentary

I find it helpful in understanding changes to Code sections to use track changes to readily see what was removed and what was added. And when the text of the public law says something like replace "(B)(ii)" at paragraph (d)(1), it is difficult to picture that in your head and you might make a mistake in figuring out what the change does.

I've done this with past public laws such as the TCJA and IRA 2022.

Here are a few for the OBBBA:

Section 36B with various changes to the Premium Tax Credit but not the one many folks were hoping for to make permanent the removal of the requirement for a PTC that household income cannot exceed 400% of the Federal Poverty Line.  Perhaps Congress will do this before 2026. Otherwise, many people will see their health insurance costs increase and many will drop their insurance.  With fewer in the insurance pool, costs for everyone is likely to go up.  Why did Congress put this limit in the PTC to start with? After all, about 60% of employees get a great tax break by being able to exclude the health insurance premiums their employer pays and there is no requirement for this exclusion that one's income has to be below 400% FPL (which is about $62K for a single person). Also, even individuals eligible for the PTC might not get it if based on their age and zip code and the §36B affordability factors, they may be found to be able to afford a second lowest cost silver plan. Again, harsh since there is no affordability factor for the exclusion for employer-provided health insurance.

Section 45S with changes to the employer credit for paid family and medical leave to expand coverage and make the provision permanent (was set to expire at the end of 2025).

Section 67 to allow educators to claim their §62(a)(2)(D) expenses that exceed the dollar amount ($350 for 2026), as miscellaneous itemized deductions that are not subject to the 2% of AGI limit so they are allowed for itemizers (non-itemizers limited to the for AGI amount at §62(a)(2)(D) (adjusted annually for inflation).

Section 68 with the new limitation for itemizers in the 37% top bracket starting in 2026. There have been proposals in the past for further cut back such as to provide that the savings from itemized deductions can't be more than 25% or 28%. This cut back to 35% is not much.

Section 108(f)(5) makes the discharge of debt exclusion for student loans when a student dies or becomes disabled permanent, but does not extend the general exclusion for cancellation of student loans that the American Rescue Plan Act of 2021 added through 2025. Also requires an SSN for the exclusion for death or disability of the student.

Section 163(h) with change to the mortgage interest deduction and new temporary interest on domestic car loans. It is odd that they put the car loan at Section 163(h)(4) thereby splitting the mortgage interest rules that are at 163(h)(3) and (5).  I already posted comments on the car loan provision that likely won't get a lot of use for the target group based on income and given the tremendous difference in price between new and used cars and domestic versus foreign, and the small tax savings from the interest deduction.

Section 163(j) with return to calculating the interest expense limitation threshold by adding back to taxable income, depreciation, amortization and depreciation effective for tyba 12/31/24; and some other changes effective for tyba 12/31/25.

Section 170 on charitable contribution deduction with a few OBBB provisions making changes.

Section 199A on the qualified business income (QBI) deduction with key change being making it permanent at the same 20% rate (House proposal for a 23% deduction is NOT in final legislation). A minimum $400 deduction if QBI from active business of at least $1,000, starting after 2025. A few modifications due to §68 limitation on overall itemized deductions.

Section 460(e) with changes to reduce the number of dwelling units per dwelling for home versus residential contracts.

Section 461(l) on excess business loss of noncorporate taxpayers is made permanent (it was already in the law through 2028). Minor modifications on inflation adjustment.

Section 1202 on gain exclusion for noncorporate holders of qualified small business stock. The holding periods, maximum gain exclusion and size of the C corporation are changed.

Hope these are helpful.

H.R. 1 OBBBA's New Limited Deduction for Interest on Car Loan

H.R. 1, the One Big Beautiful Bill Act (OBBBA) (officially known as An Act to provide for reconciliation pursuant to title II of H. Con. Res. 14) was signed into law on July 4, 2025. It has just over 100 tax changes! One of these is at SEC. 70203, No Tax on Car Loan Interest. Technically, it is a deduction for interest on certain car loans available to individuals below specified modified AGI levels, whether or not they itemize.

In reviewing the details, it doesn't seem that it will benefit too many people because the Senate added a requirement that it must be a new vehicle (the House allowed the deduction for a used vehicle), the income levels are low relative to the average price of a new vehicle being almost $50,000, and the eligible individuals having a marginal tax rate of 10%, 12% or 22% will find that the tax savings will be less than the money savings of buying a used car. Note that by "benefit" I don't mean just getting a lower tax bill, but having to spend more money to get the tax break when comparing the cost differential between a new and used vehicle.

Here is my summary of this new provision and some observations and an example (it's a bit long as is SEC. 70203!).

•        §163(h)(4)

•        Existing (h)(4) becomes (h)(5).

•        Deduction available for 2025 through 2028.

•        Deduction from AGI even if don’t itemize.

•        Apparently also allowed for AMT.

•        Qualified Passenger Vehicle Loan Interest - Debt incurred after 2024 for purchase of, and secured by, a first lien on “applicable passenger vehicle” for personal use.

•        Refinancing of such debt that doesn’t exceed balance at refinancing date.

•        No related party financing.

•        Interest deduction can’t exceed $10,000 for any tax year.

•        Phaseout - Reduce otherwise deductible amount by $200 for each $1,000 or portion thereof by which MAGI exceeds $100,000 ($200,000 if MFJ)

•        MAGI = AGI + §911, §931 and §933 exclusions

•        Must include VIN on return.

•        “Applicable passenger vehicle”

•        Original use starts with taxpayer.

•        Manufactured primarily for use on public roads.

•        Has at least 2 wheels.

•        Is a car, minivan, van, SUV, pickup truck or motorcycle.

•        Treated as a motor vehicle under Title II of Clean Air Act.

•        Has gross vehicle weight of less than 14,000 pounds.

•        Final assembly was in the U.S. (§163(h)(4)(E)(i)) (Observation: Likely dealer will have info.)

•        New §6050AA – lender required to issue information report (likely 1098 type) if interest is $600 or more. Must show origin date of loan and year, make, model and VIN of vehicle, and other info required by IRS.

•        Observations:

•        Interest rates on new cars per B of A at July 2025 is 5.64%.

•        Higher if have poor credit score.

•        Average new car price per Kelley Blue Book is $49,740.

•        Loan amount to generate $10,000 of interest expense is

•        $166,667 if interest rate if 6%

•        $ 76,923 if interest rate is 13%

•        Once MAGI reaches following, no interest deduction:

•        $150,000

•        $250,000 if MFJ

•        If financing 80% of new car costing $45,000 (so loan of $36,000), likely need income of $30,000 before taxes (but also relevant other expenses and debts outstanding).

•        Interest expense on $36,000 loan at 6% = $2,160

•        Tax savings at marginal rate of

•        12% = $259

•        22% = $475

•        Given price difference between new and used vehicles, tax savings of deducting interest not enough to justify buying a new versus used vehicle.

•        Example:

•        1/2/25 - Amy, single, with 2025 MAGI of $110,000 purchased new car for personal use for $35,000 and financed $30,000 with dealer at 6%.

•        Car assembled in U.S.

•        2025 interest expense is $1,800

•        Amy’s MAGI of $110,000 requires her to reduce deduction by 10 x $200 or $2,000, but not below $0 so she has no possible deduction.

•        If Amy’s MAGI were instead $100,000, she can deduct entire $1,800 of interest. Savings for Amy who has marginal rate of 22% is $396.

•        Observation: Amy will save far more than $396 per year for four years by purchasing a used vehicle and having a smaller loan or buying a less expensive new car with a smaller loan.

My take: Given that the people who qualify for this won't have $10,000 of interest expense, the phaseout level starts at fairly low amounts for people likely to be able to afford a new car, the reporting requirement for lenders, this provision should have been omitted and the $30 billion it costs the fisc over 4 years (per JCX-35-24 (7/1/25)) should have been used for deficit reduction.

Comments?  Do you think I got anything wrong?

What do you think?

OBBBA Effective Dates Caution

Often, the effective date for tax legislation is for tax years beginning after 12/31/xx with xx being the year the legislation was enacted. So, provisions often start the year after the law is enacted. That doesn't give much time for planning or for the IRS to issue needed guidance. For example, the Tax Cuts & Jobs Act was signed into law on December 22, 2017 with most provisions effective 1/1/18.

The House's 5/22/25 and Senate's 6/28/25 versions of the One Big Beautiful Bill (H.R. 1) have varying effective dates both within the bill and between these versions for similar provisions. Also, some provisions in the House are temporary and most in the Senate are permanent.

But I want to highlight a few changes that would repeal provisions for individuals this year that were supposed to be in the law through 2032! 

These provisions were set to expire after 2032 per changes made by the Inflation Reduction Act of 2022.

Residential energy credits of Sections 25C and 25D (§25D was to phase out for 2033 and 2034):

  House and Senate bills - these credits end for property placed in service after 12/31/25.

Used clean vehicle credit of Section 25E:

  House bill - must acquire (take possession) by 12/31/25

  Senate bill - must acquire by 9/30/25

New clean vehicle credit of Section 30D:

  House bill - ends after 2025 but for 2026, limited to vehicles for which manufacturer produced no more than 200,000 vehicles.

   Senate bill - must acquire by 9/30/25

So, it's important to watch for the effective date in the final bill. But, if someone is eligible and really wants the clean vehicle credit, best to assume it ends 9/30/25. And if you really want the solar panel credit of §25D (or other items it covers) or energy efficient doors, windows and other items of §25C, best to act now to be sure it is all installed by 12/31/25. While it is unlikely the new termination date will be later than 2025 for the residential energy credits given current versions of OBBB, you never know.

What do you think?

How Does the Revised SALT Cap in House OBBBA Work?

On May 22, the House passed H.R. 1, the One Big Beautiful Bill Act (OBBBA), and it now goes to the Senate Finance Committee where changes will occur. Some of the House provisions will need to be removed due to the Senate using the Budget Reconciliation Process which calls for restrictions on the nature of the changes, such as they must deal with revenues. And, the Senate will have different ideas on what is currently in the bill which includes over 40 tax changes and some non-tax provisions.

One item of contention among members of both parties is whether to keep the TCJA $10,000 SALT cap that expires at the end of this year. This is an important provision because it could cause the bill to not get enough votes to pass so compromise is likely. The House bill will increase the cap but adds a lot more, particularly to IRC Section 275, Certain Taxes. This rule is in Part IX of Subchapter B of Chapter 1 of Subtitle A or Title 26 (IRC); Part IX is titled Items Not Deductible. With the TCJA, the SALT cap was at IRC Section 164(b)(6) and was brief.

Where a legislative proposal or public law makes changes to various parts of an existing Code section, I often find it helpful to create a track changes of the affected Code sections to get a better understanding of the changes.  I have created such a document for the House's SALT changes which you can find in this 18-page pdf with changes shown using track changes.  Part of the reason it is long is because I include all of Section 164 despite few changes to it in order to get a better understanding of the changes to Section 275. The SALT cap changes also change a few partnership provisions.

I wish I could explain here how the SALT cap changes work, but I still need more time to figure it all out as the changes are a bit intertwined with other Code sections and H.R. 1 changes. This change does not meet the principle of simplicity!

If you have figured it all out I applaud you! Please leave comments to help us all out. 

It is likely that the Senate and Conference Committee will continue to make changes.

What do you think?