Deeper Into the Senior Exemption and Overtime Deduction

Welcome to Accounting in the Wild, where we'll discuss various subjects in the tax and accounting world. Also featuring tales from the field and interviews on various tax and accounting subjects. All this and much, much more on Accounting in the Wild. And now here's your host, Jason Dinison.

This week on Accounting in the Wild, we'll talk about two Schedule 1A items, one of which hasn't gotten a lot of attention, and that's the new deduction. For seniors, people age 65 and older, we'll also talk a little bit about some provisions relating to the overtime deduction. That's our topic this time around on accounting in the wild. My name is Jason Dinison and welcome to the show. So sometimes I like to talk about things that I'm working on as an educator, and one of those is a twenty twenty-six year-end session, and one of the items that I have in that session is a quick discussion of the senior exemption, the new deduction for people age sixty-five or older. This is another one of those Schedule 1A deduction items, and it hasn't gotten much attention compared to things like the tips deduction or the overtime deduction. So let's talk about it. Now here's the thing, it's actually pretty simple and straightforward. There's not a lot to say about it, honestly, but let's say what there is to say about it. This is another creation from the one big beautiful bill that is a temporary deduction, just like tips, overtime, and vehicle loan interest. It's temporary now through twenty twenty eight. Some of the other background on this is that this is an exemption deduction. TCJA, the Tax Cuts and Jobs Act, suspended exemption deductions for twenty eighteen through twenty twenty five. And the big beautiful bill made that suspension permanent. So exemption deductions are gone from the tax code, with one temporary exception, and that's an exemption deduction for people age sixty-five or older. It's six thousand dollars per taxpayer. For married filing jointly, if both spouses are age sixty-five or older, then it's a twelve thousand exemption deduction. Note that this is for the primary taxpayer, so the person or the married couple filing the tax return. It's not available for dependents. So if a taxpayer is claiming their parent or something as a dependent and that person is age 65 or older, you don't get $6,000 for them. By the way, married filing separately cannot claim this deduction at all. There's an AGI phase out based on modified adjusted gross income of $150,000 for married filing jointly or $75,000 for all other filing statuses. By the way, for a lot of taxpayers, modified adjusted gross income will be adjusted gross income. The adbacks for modified adjusted gross income are things like the foreign earned income exclusion. If you don't have things like that, then it'll just be adjusted gross income. The amount of the reduction is 6% of the excess above the threshold. And there's no rounding here. You don't round off to nice even $1,000 increments or things like that. You count it exactly. So say you have a single taxpayer age 65 or older, and their modified adjusted gross income is $93,379. The first thing you do is you calculate the excess above the threshold. So for a single person, the threshold starts at $75,000. So this person is $18,379 above the threshold, and you multiply that by six percent. So 0.06, and that equals $1,103. And so you're reducing the six thousand by one thousand one hundred and three dollars. That person, a single person with AGI of ninety-three thousand three hundred seventy-nine, would get to take a deduction instead of six thousand, it would be four thousand eight hundred and ninety-seven dollars. Many people have asked me if the taxpayer has to be on social security in order to receive this deduction. And the answer is no. This is very simple, actually, this deduction. It comes from section 151 D five C and is very simple wording. The taxpayer has to be age sixty five or older, and if they are they get a six thousand dollar exemption deduction subject to the modified adjusted gross income limitations. That's it. There's no requirement to be drawing Social Security. The requirement is to be age sixty five or older. The other thing that I wanted to talk about today is the overtime deduction. Just a little bit of background on that. Your involvement in dealing with the overtime deduction will depend on whether or not you have business clients who have employees that they're paying overtime to or not. If you don't have business clients that you're paying overtime to, then it's pretty straightforward. Your clients will be filing Form 1040, they'll get a W 2 from their employer, and if there's qualifying overtime, it'll be separately stated in box 12 of the W-2, and that's what you go with. If you have business clients, though, who are paying overtime to their employees, then it becomes a lot more important to know what is qualifying overtime for purposes of the Schedule 1A deduction, because the employer has to separately track that overtime and report it on the W 2. The other thing is, even if you don't have business clients, if you're talking to individuals and they're thinking that they get overtime and they're going to get this deduction, it's important to be able to talk to them about what really is this deduction because it's not all overtime. It's only overtime paid under section seven of the Fair Labor Standards Act. FLSA is the federal labor law that requires employers to pay overtime at a rate of at least time and a half when hours worked in a work week exceed forty. There are some other industries like law enforcement that are also covered under section seven of FLSA that have a different measurement period for when overtime applies. The point is if it's section seven of FLSA, it is qualifying overtime for purposes of being able to take this deduction. So the employer pays the overtime. The employee gets to potentially take a deduction for it on Schedule 1A on their personal tax return. So this gets in then to qualifying overtime and how employers have to keep track of this. And employees also need to understand that not necessarily all overtime is going to count. So there are various types of overtime that can be paid. State mandated overtime. A few states mandate that if an employee works above a certain number of hours in a day, they have to be paid overtime. Sometimes an employer might need to pay overtime to salaried or exempt employees. And then you have collectively bargained overtime. Now the collectively bargained part always causes a stir among practitioners. So let's talk about that when we say collectively bargained overtime is not qualifying overtime for the big beautiful bill deduction. What do we mean by that? The answer is we mean the extra beyond what FLSA mandates. So for example, a collective bargaining agreement might call for overtime to kick in at 35 hours worked. The overtime paid between thirty five and forty hours would not be qualifying overtime. It is overtime, but it's not qualifying overtime for this deduction. Then once you hit forty hours, overtime paid beyond forty hours would be FLSA. And so it would be qualifying overtime. And that leads into a nice point that we need to keep straight here because we talk about qualifying overtime and non qualifying overtime. Overtime is overtime. Overtime paid under some provision other than section seven of FLSA is still overtime. So state mandated overtime is overtime. Collectively bargained overtime is overtime. But it's not qualifying overtime, which means that for purposes of the employee being able to deduct that overtime on Schedule 1A, they can't do it. Speaking of Schedule 1A, that's where the deduction is taken. You have to have a W 2 showing overtime in box 12 code T T. That's new for 2026. In 2025, you could deal with the overtime deduction in any reasonable manner because W-2 reporting wasn't required. Now it is. So if you have business clients, they need to make sure they're tracking this properly because they have to report it in box twelve. And for individual filers, if they're receiving overtime, they can only take a deduction if it's separately stated in box twelve. The maximum deduction is twenty-five thousand for married filing jointly and twelve thousand five hundred for all other filing statuses, except married filing separately, which can't claim the deduction at all. By the way, on married filing jointly, it's $25,000 per tax return, so you don't have to allocate it between the spouses. If one spouse has $25,000 of qualifying overtime, then you still get a $25,000 deduction. There are AGI phaseouts which are different from the senior exemption phase outs. This deduction starts to phase out at $300,000 for married filing jointly or $150,000 for all other statuses. Those dollar amounts, by the way, are not indexed for inflation. You lose $100 for every thousand above the threshold. Here's another weird thing, and I like to point out these weird things. On the phase out, most phaseouts under the tax code have a familiar flow as far as how you calculate them. But not this one. Or the tips deduction. Over time and tips, the mechanics of the phase out are the same and it's different from what we're used to. So usually an amount in excess of a threshold is considered to be a full thousand dollars above the threshold at one dollar above the threshold. So with most phaseouts, if we say for married filing jointly, the phase out starts at three hundred thousand, and that couple's AGI is three hundred thousand and one, it's treated as being one thousand dollars above the threshold. One dollar is a thousand most of the time. But not on this deduction, nor with the tips deduction. And the best way to wrap your head around this is well, there's a few things you could do. One would just be think of it this way. You're taking the amount above the threshold and dividing it by 1000, and then dropping anything after the decimal point. Or put another way, you're rounding it down. Looking at schedule 1A is actually helpful. I when I first realized that this is how the phase out works, I just went to Schedule 1A and ran through a couple of examples. So say you have that married couple whose AGI is 300,001, so they're one dollar above the threshold. You take one divided by 1,000, and then you round it down to the nearest whole number or the next lowest whole number. Not the nearest, but you round it down to a whole number. So in this case, it would round down to zero. So someone whose AGI is above the threshold might not necessarily lose any of the deduction. You could have AGI of up to three hundred thousand nine hundred and ninety-nine dollars, and you wouldn't lose the deduction at all. You'd get the full amount of the deduction. The actual phase out technically would start when you get to three hundred and one thousand dollars. Another example, I just came up with a number of three hundred and seventeen thousand four hundred and eighty-six dollars for married filing jointly. That's seventeen thousand four hundred and eighty-six dollars above the threshold. Divide that by one thousand, that equals seventeen point four eight six. And you round down. So you're rounding down to seventeen. And that's what you calculate the phase out on. 17 times 100 is $1,700. So in that situation, you'd lose $1,700 off of your deduction. That is not normally how phaseouts work in the tax code. So in our first example, $300,001, normally the first thing you do is you round that up to $301,000 and then calculate the phase out. Or in the second example, 317,486, normally you round it up to 318 and then calculate the phase out. But that's not how the overtime deduction phase out works, nor is it how the tips phase out works. And if you ask why, the answer is because that's the way it was written in the big beautiful bill, and other code sections dealing with other things that have phaseouts are written in different ways. So you really have to look anytime you see a phase out, what does the law say on the mechanics of this phase out? That brings us to the end of another episode of Accounting in the Wild. Thanks so much for joining us and catch us again next time.