After being passed by the House of Representatives, this year’s reconciliation bill (H.R. 1) moved to the Senate, which passed its own version of the legislation today, July 1.  The Senate bill would preserve without significant change many tax-related items from the House bill.  There are several provisions, however, where the Senate bill varies from the version the passed the House earlier.  The Senate-passed legislation will now head back to the House, where its fate is somewhat uncertain.

We previously covered several of the relevant tax provisions when House passed its version of the reconciliation bill.  This article is part of a series of articles examining how those provisions would change under the Senate’s legislation.

As discussed in our prior post, the House bill would provide a new deduction for “qualified overtime compensation” under a new section 225 of the Code.  The Senate bill preserves the deduction for qualified overtime compensation but makes some changes.  To begin, the Senate bill would limit the annual deduction for qualified overtime to compensation to $12,500 ($25,000 for taxpayers filing a joint return).  The House bill did not include a cap.

Next, rather than make the deduction unavailable to “highly compensated employees” (the approach that the House took in its draft of the bill), the Senate proposal would phase out the deduction for taxpayers whose “modified adjusted gross income” exceeds $150,000 ($300,000 for joint filers).  The bill defines modified adjusted gross income as (1) adjusted gross income plus (2) any amount excluded from gross income under Code sections 911, 931, 933, which relate to income earned by U.S. taxpayers abroad, from Guam, and from Puerto Rico, respectively.  Under the proposed language, the deduction for qualified overtime compensation would be reduced by $100 for each $1,000 by which a taxpayer’s modified adjusted gross income exceeds the relevant threshold.  Thus, taxpayers with modified adjusted gross income between $150,000 and $275,000 ($300,000 to $550,000 for joint filers) would receive a limited deduction for qualified overtime compensation.  And taxpayers with adjusted gross income of $275,000 or more ($550,000 or more for joint filers) could not claim any deduction for qualified overtime compensation.

The Senate bill also would also provide that a married taxpayer must file a joint return with their spouse to claim the deduction for qualified overtime compensation.  Thus, married taxpayers who u file separate returns would be ineligible to claim the new deduction for qualified overtime compensation.

In addition to these limitations on the deduction, the Senate bill suggests some administrative and technical changes to the House proposal.  For example, the House bill provided that employers preparing Forms W-2 would need to separately list the amount of qualified overtime compensation that an employer paid to an employee.  The Senate bill would expand that disclosure requirement to income reported using other forms, like Forms 1099, by amending Code section 6041 to require that such reports include a separate disclosure of qualified overtime compensation.  The expansion to independent contractor reporting is somewhat puzzling, as independent contractors generally do not receive overtime pay under the Fair Labor Standards Act.  Additionally, the bill seems to limit the deduction to the amount of qualified overtime compensation that actually is reported on the relevant income-reporting forms, like Forms W-2 or Forms 1099.  This could result in taxpayers being unable to claim a deduction for qualified overtime compensation that an employer (or, possibly, other type of payor) did not properly include overtime payments on the relevant information returns.

The Senate bill also would adopt a transition rule providing that, for tax years beginning before January 1, 2026, employers can use any reasonable method to provide a separate accounting of qualified overtime reported on the forms mentioned above.

Finally, the Senate bill proposes some technical refinements, like clarifying that that Treasury’s adjustments to withholding tables will apply for taxable years beginning after December 31, 2025, and providing that implementing regulations can (or, perhaps, shall) include language designed to prevent abuse of the deduction. Like the House proposal, the Senate bill would make the new deduction for qualified overtime compensation available beginning in the current year and would sunset after 2028.