Claim Your $12500 Federal Deduction on Overtime
The 2026 tax season is a big win and a frustrating catch for you as an hourly worker in California. With the One Big Beautiful Bill Act (OBBBA) of 2025, however, there is a new federal deduction, namely overtime pay. The blood, sweat, and tears premium you are getting for working after 40 hours of work is tax-deductible, the first time.
Nevertheless, you should get to know about the Golden State split before spending your estimated refund. As long as the IRS is extending you a hand, the Franchise Tax Board (FTB) is pulling it away.
This is how you can take home your federal $12,500 deduction of overtime and not get bitten by a state tax bill that is also not disclosed. Get an experienced professional (like an IRS audit lawyer) who will guide you in the best possible way.
Learn the Definition of Overtime
The new deduction on the federal front is not on all overtime pay, but rather very particular. It only pays on the high part of your overtime pay. In the US, overtime is usually time and a half under the Fair Labor Standards Act (FLSA). This inference is made concerning the additional half.
- The Cap: You can subtract up to 12500 of this high premium pay in case you are single, or deduct 25000 in case you are married and are filing jointly.
- The Catch (Californians): It is applicable to federal weekly overtime (more than 40 hours per week). It is not applicable to unique daily overtime (more than 8 hours in a day) in California.
- Income Limits: The deduction fades away when your modified adjusted gross income is more than 150000 (300000 in the case of joint filers). When you are in doubt, better to look for an expert (like a tax attorney in Pasadena).
What is So Called California Trap?
It is the sting of the critical here that you have to guard. California has decided to be independent of this particular federal tax break.
California needs its own calculations so that you can add back this deduction in your state filing. This implies that you will receive a reduced federal taxable income and a higher taxable income in California. To most, this will lead to a reduced state refund or a surprise balance due.
Tips that Will Help Get Deduction
In order to find a way to bridge this divide, consider the following tips:
- Find the New W-2 Box: Employers now must separately use the qualified overtime compensation to report on your W-2, 2026 tax year. Seek this particular number instead of being guessers.
- Pacify Schedule CA (540): This is because when you are preparing your California filing, you will need to use Schedule CA to modify your federal amounts. You would have to deduct the federal deduction on Line 1 of Schedule CA to include the same income back on the state.
- Know Your Hours of work per day vs. per week: In case you have 10-hour shifts, you will be paid the overtime daily (California) but not weekly (Federal). When you are on pure daily overtime, you cannot claim the federal deduction whatsoever.
- Consult a Professional: Any difference between your federal and state returns may confuse your tax software, due to this creating a basis difference. Federal benefit is guaranteed without causing an FTB audit through a quick consultation with a CPA.
The new overtime deduction of $12,500 is an excellent instrument for reducing the federal tax payment. But to the residents of California, it generates a headache in the bookkeeping. Knowing that the FTB expects you to pay tax on that same income, you can do so in advance, save a little more in case the state difference appears, and have the best of both tax worlds without the April shock.
