Doctors: Don’t Count on the New Overtime Deduction
It’s rigged against hard-working physicians.
I got excited about the new OB3 provision that added IRC §225, the deduction for qualified overtime compensation.
At first glance, it sounds amazing: a married couple filing jointly can deduct up to $25,000 of qualified overtime on the federal return (and up to $12,500 if you’re not filing jointly), as long as joint income is under $300,000.
That would be a great setup for a hospitalist who puts in a lot of overtime, right?
Unfortunately, this won’t work for most docs.
What Counts as “Qualified Overtime Compensation”
Qualified overtime compensation is not your entire overtime paycheck.
It is only the premium portion of overtime pay that is required under the Fair Labor Standards Act (FLSA). In other words, the deductible amount is the extra pay above your regular rate.
In plain English:
If you earn “1.5x” for overtime, only the extra 0.5x portion is what counts.
Why Most Docs Don’t Qualify
Most physicians are treated as FLSA-exempt “professional” employees. If you are exempt, you do not have FLSA-required overtime, which means you generally do not have “qualified overtime compensation” for purposes of IRC §225, even if your employer labels something as “overtime.”
That’s probably why, as a resident, we worked so hard and never received any overtime pay (rigged system!).
Who Might Qualify Instead
If you are a nurse or another non-exempt employee of a hospital or residential care facility, you may qualify. The FLSA rules treat many healthcare roles differently and nurses are commonly non-exempt depending on facts and duties.
How Much Is the Deduction (If You Qualify)?
Maximum deduction
$25,000 for married filing jointly
$12,500 for everyone else
Phaseout for joint filers:
Starts when Modified AGI exceeds $300,000
For most employees, Modified AGI = AGI
Reduced by $100 for each $1,000 over $300,000
Fully gone at $550,000 Modified AGI
Example: the “best case” scenario
Let’s say you’re a nurse with $275,000 of W-2 wages and your paystubs $25,000 of qualified overtime compensation (again, typically the “half-time premium” portion, not the entire overtime payment). If you’re under the income limit, you can potentially deduct up to $25,000 on your federal return.
This reduces federal taxable income. It does not mean the money avoids payroll taxes. You still generally owe Social Security and Medicare taxes on wages, and state taxes may still apply.
What If I Make More Than $300k?
You may still qualify for a deduction, but it phases out.
Example: joint MAGI of $400,000
Amount over $300,000 = $100,000
$100,000 / $1,000 = 100
Reduction = 100 × $100 = $10,000
New Max deduction = $25,000 − $10,000 = $15,000
So if your qualified overtime compensation is $15,000, you may be able to deduct the full $15,000. If it’s higher, you’d generally be capped at the phased-down maximum.
Where This Shows Up on the Return
Per IRS guidance, this is claimed on the new Schedule 1-A and flows onto Form 1040 as an additional “below-the-line” deduction that reduces taxable income.
Bottom Line
If you are genuinely FLSA overtime-eligible (think nurse or other non-exempt employee) and your household income is near the $300,000 joint threshold, this is a real planning opportunity for 2025–2028.
Just remember:
It’s only the premium portion (the “half” in time-and-a-half), not the whole overtime check
It phases out from $300,000 to $550,000 Modified AGI (joint)
It sunsets after 2028 (so it’s gone for 2029 tax years)
It reduces federal taxable income, but payroll taxes and state income tax still generally apply
And yes, it’s disappointing that this won’t help most hard-working docs. Maybe someday we’ll get a tax rule that rewards physician overtime the way it rewards everyone else’s.
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