No tax on overtime for individuals working in Alaska

According to the One Big Beautiful Bill (OBBB), there are no taxes on qualified overtime pay for the years 2025 through 2028. But what exactly counts as qualified overtime?

What Is Qualified Overtime?

Under the Fair Labor Standards Act (FLSA), an employee is entitled to overtime pay for any hours worked beyond 40 in a workweek, at a rate of at least 1.5 times their regular rate of pay.

Similarly, the Alaska Department of Labor and Workforce Development – Labor Standards and Safety Division (Pamphlet 100, Sec. 23.10.060(b)) requires overtime pay for hours worked over 8 in a day or 40 in a week, also at 1.5 times the regular rate.

How Does OBBB Define Qualified Overtime Compensation?

Under OBBB, qualified overtime compensation refers specifically to the premium portion of overtime pay — the “half” portion of time-and-a-half compensation.

Example

Let’s look at a simple example:

•    Regular hourly rate: $12/hour

•    Overtime rate: $18/hour (time-and-a-half)

•    Hours worked: 40 regular hours + 8 overtime hours

The employee earns:

•    Regular pay: 40 × $12 = $480

•    Overtime pay: 8 × $18 = $144

Of that $144 in overtime pay, only the premium portion — the extra $6 ($12*0.5) per hour (8 × $6 = $48) — qualifies for the OBBB tax exemption.

In other words, only the additional half of the time-and-a-half rate is deductible under OBBB, not the entire overtime amount.

Deduction Limits and Eligibility

The maximum annual deduction is $12,500 for individual filers or $25,000 for those married filing jointly.

This deduction begins to phase out when the taxpayer’s modified adjusted gross income (MAGI) exceeds $150,000 (or $300,000 for married couples filing jointly).

This provision applies only to individuals with valid Social Security numbers and does not apply to married couples filing separately.

More examples:

Employees’ timesheet:

Employee	Monday	Tuesday	Wednesday	Thursday	Friday	Saturday	Sunday	Total Hours Worked
John	8	8	9	8	8	0	0	41
Steve	10	8	6	8	8	0	0	40

Calculations:

	per FLSA rules:	per paycheck:
John:
Total hours worked	41	41
Regular hours	41	40
Regular rate of pay	$25	$25
Total Regular pay:	41*25 = 1,025	40*25 = 1,000
Overtime hours:	1	1
Overtime premium pay:	25*0.5 = 12.50	25*1.5 = 37.50
Total weekly earnings:	1,025+12.50 = 1,037.50	1,000+37.50 = 1,037.50

John can deduct qualified overtime compensation for 1 hour in the amount of $12.50 on his 1040 return.

Steve:
Total hours worked	40	40
Regular hours	40	38
Regular rate of pay	$28	$28
Total Regular pay:	40*28 = 1,120	38*28 = 1,064
Overtime hours:	0	2
Overtime premium pay:	0.00	2*(28*1.5) = 84
Total weekly earnings:	1,120	1,064+84 = 1,148

Steve cannot deduct his overtime compensation from this pay period since he did not work over 40 hours in a week per FLSA.