Federal return: same rules as everywhere
The deduction is federal. If you're an overtime-eligible employee under the Fair Labor Standards Act, you can deduct the FLSA overtime premium up to $12,500 ($25,000 joint) on your federal return, whatever state you live in.
California return: overtime is still taxed
California hasn't adopted the deduction. It's also taken after adjusted gross income, so it doesn't flow into state returns that start from federal AGI, as California's does. Your overtime stays fully taxable for state income tax.
Daily overtime is the catch
California law requires overtime after 8 hours in a day, double time after 12, and overtime on a seventh straight day. Federal law only requires overtime after 40 hours in a workweek. The deduction counts only the federal part.
Four 10-hour shifts in a week: 40 hours.
California pays 8 hours of daily overtime (2 per shift) at time-and-a-half.
Federal overtime hours: 0, because the week didn't go over 40. Qualified overtime: $0.
Five 10-hour shifts in a week: 50 hours.
California pays 10 hours of daily overtime. Federal law requires 10 hours over 40.
Qualified overtime: the premium on 10 hours, half your regular rate × 10.
Double time follows the same logic. If California requires double time, only the federal half-time premium on hours over 40 counts. Notice 2025-69 lets you use one quarter of double-time pay when hours were paid at two times your rate.
What your W-2 will show
From 2026, your employer reports qualified overtime in box 12 with code TT, already limited to the federal premium. Use that number rather than the overtime totals on your pay stub.
Updated November 3, 2026. Sources: Internal Revenue Code §225, IRS Notice 2025-69, IRS questions and answers on the qualified overtime deduction (FS-2026-13), IRS Fact Sheet 2025-03.