The answer is not obvious, and a lot of people are getting it wrong on tax software or by guessing. I help Nebraska taxpayers understand these changes, take advantage of the deduction (if eligible), and reduce tax surprises.

What is the New Overtime Deduction?

On July 4, 2025, the United States government signed a law called The One, Big, Beautiful Act (OBBBA), which includes a new overtime deduction that allows certain taxpayers to deduct a portion of their overtime wages from their federal taxable income.

This is different from standard wage income and different from business or self-employment deductions. It's specifically designed to give relief to those who work extra hours but aren't operating as independent businesses.

The deduction generally works by allowing eligible taxpayers to subtract a portion of their reported overtime wages form their federal Adjusted Gross Income (AGI), which can also lower Nebraska taxable income.

Who is Eligible for the Overtime Deduction?

Most commonly, this affects people who:

Receive overtime pay on a W-2 (not 1099)
Work hourly jobs where overtime is reported separately
Are not self-employed for that overtime income
Have overtime documented as overtime wages on the W-2

It typically does not apply to:

1099 contractor or gig income
Flat salary without overtime reporting
Business owners reporting Schedule C income
Miscellaneous payments not flagged as overtime by the employer

If your W-2 shows overtime as part of box 1 or via a separate code, you may be eligible, but the specifics matter.

How the Overtime Deduction Helps Nebraska Taxpayers

Nebraska taxes Federal Adjusted Gross Income (AGI) as its starting point. So if a deduction reduces your federal AGI, it generally reduces your Nebraska taxable income as well.

Here's the impact chain:

Overtime deduction reduces federal taxable income
This reduces your Federal AGI
Nebraska starts with Federal AGI to calculate state tax
Lower AGI = lower Nebraska income tax

That is why is it important to correctly ciam the overtime deduction before Nebraska tax is applied.

Does TurboTax or Other Software Handle This Automatically?

Not always. many popular tax software packages don't catch new deductions automatically, require specific reporting steps, or misclassify overtime income.

This can lead to overstated income, a higher tax liability, and lost deductions.

That's where personalized tax prep pays off, I make sure new deductions like this one are applied correctly and entirely.

Tip: Only the premium portion (the extra half) of time-and-a-half FLSA overtime pay from federal income tax, up to $12,500 (or $25,000 if married filing jointly) is deductible.

(e.g., if your rate is $20/hr. and you make $30/hr. during overtime, the $10 premium counts, not the full $30/hr.).

Income Phase-Out

The deduction is reduced for higher earners, phasing out as Modified Adjusted Gross Income (MAGI) exceeds $150,000 (for single filers) or $300,000 (for married filing joint filers).

Employers are not required to report this in box 14 of the W-2, however it is required starting in the 2026 tax year.

If the employer tracked overtime in 2025, it will be reported as the OTPRE (overtime premium) in box 14 of the 2025 W-2.

Note: Payroll taxes (Social Security/Medicare) still apply.

Common Mistakes I see

Reporting overtime as "regular wages" instead of overtime income
Leaving the deduction off entirely
Filing Nebraska tax before the federal overtime adjustment
Misunderstanding state treatment of federal income items

One small reporting error can easily cost you hundreds or thousands in unnecessary taxes.

Example: How the Deduction Might Help

Here's a simplified example:

W-2 wages: $60,000
Overtime wages: $5,000
Deductible overtime: $3,000
Adjusted Gross Income after deduction: $60,000 - $3,000 = $57,000
Nebraska taxable income starts at lower AGI, resulting in lower federal tax, bigger refund or smaller balance due

Actual numbers will vary per situation, that's why an accurate review matters.

How I Help Nebraska Workers With Overtime Deductions

As a CPA and Enrolled Agent based in Lincoln, I help clients:

Identify eligible overtime deduction amounts
Apply them correctly on their federal return
Ensure Nebraska income reflects the adjusted AGI
Avoid costly software mistakes
Plan estimated taxes if needed

Whether your overtime came from manufacturing, healthcare (nurses and doctors), trucking, or service jobs, every dollar counts.

Who Should Review Their Return With a CPA

You may benefit from a review if you:

Received overtime on a W-2
Filed taxes with software and didn't see a deduction
Owe more tax than expected
Had intermittent overtime throughout the year
Want to maximize deductions without audits

This is especially true for Nebraska workers whose overtime was unpredictable from week to week.

How The Tax Preparation Process Works

You fill out a short online form here
You will receive an email to upload your documents securely and pay
I review everything personally
I prepare and file your return
You get a clear explanation and support

I work 100% remotely, but I'm based right here in Lincoln, Nebraska, so you get both convenience and local expertise.

Get Your Overtime Taxes Done Right

If you worked overtime and want to make sure your deduction was handled correctly, and that you didn't miss anything on your Nebraska return, I can help.

Start here to schedule your tax preparation or submit your info. You can also send me an email at ben@benvannesscpa.com.

FAQ

Is the overtime deduction automatic when I file my tax return?

No. In many cases, the overtime deduction is not applied automatically by the tax software. It often depends on how your employer reported your wages and how the return is prepared. A manual review is usually needed to confirm eligibility and proper reporting.

Does the overtime deduction apply to Nebraska state taxes?

Indirectly, yes. Nebraska starts with your Federal Adjusted Gross Income (AGI). If the overtime deduction reduces your federal AGI, it generally reduces your Nebraska taxable income as well, which can lower your state tax bill.

Can I take the overtime deduction if I'm self-employed or paid as a 1099 contractor?

No. The overtime deduction typically applies only to W-2 employees whose overtime pay is reported by their employer. Self-employed or gig income reported on a 1099 does not qualify.

How do I know if my overtime was reported correctly on my W-2?

This depends on how your employer coded the wages. Some employers report overtime separately, while others include it in total wages. Reviewing the W-2 and payroll details is often necessary to determine eligibility.

What happens if I already filed my return without the overtime deduction?

If you were eligible and the deduction was missed, you may be able to amend your return to claim it and potentially receive a refund. This applies to both federal and Nebraska state returns if the adjustment changes your taxable income.

Start here to schedule your tax preparation or submit your info or send me an email at ben@benvannesscpa.com.

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