The Internal Revenue Service (IRS) and Treasury Department recently released a Frequently Asked Questions (FAQs) Fact Sheet to help taxpayers understand the new tax deduction for qualified overtime compensation. The “No Tax on Overtime” deduction is available for tax years 2025 through 2028 and is designed to exclude a portion of qualifying overtime pay from federal income tax.

Generally, the deduction applies to qualified overtime compensation, which generally means the “half” portion of time-and-a-half pay required under federal law for overtime. The overtime pay must be in excess of the normal full-time pay rate. For example, if an employee earns $18 per hour and is paid $27 per hour for overtime, only the additional $9 per hour for overtime pay is deductible.

Under the One Big Beautiful Bill Act (OBBBA), the qualified overtime exclusion is allowed for up to $12,500 ($25,000 for joint filers) of overtime compensation. The overtime exclusion applies to taxpayers with modified adjusted gross income (MAGI) of up to $150,000 ($300,000 for a joint return). There are phaseouts on the deduction above those levels. The deduction will reduce federal taxable income, but it does not impact the taxation of wages for purposes of Social Security, Medicare or state and local income tax.

Eligible taxpayers may claim the deduction regardless of whether they itemize or take the standard deduction. Employees and certain independent contractors can qualify if their overtime meets certain rules under the Fair Labor Standards Act (FLSA). The IRS FAQs include tools to help taxpayers determine if the overtime they receive is qualified under federal standards.

For the 2025 tax year, the IRS is offering penalty relief for employers as payroll systems are updated to track qualified overtime amounts. Full reporting requirements begin for tax year 2026. Updated 2026 W-2 and 1099 forms will include a dedicated field for qualified overtime compensation. Prior IRS notices have covered how an employee can report overtime compensation if an employer does not separately report the amount of qualified overtime compensation.

Safe Harbor Guidance Issued for Retirement Plan Distributions

In IRS Notice 2026-13, the Internal Revenue Service (IRS) updated and replaced the safe harbor written explanations to reflect changes in the law. Retirement plan administrators may rely on the updated safe harbor language to satisfy Internal Revenue Code Sec. 402(f) requirements for providing eligible rollover distribution information to plan participants and beneficiaries.

The Notice maintains the longstanding structure of two prior safe harbor templates, one for distributions from a non-Roth account and one for distributions from a designated Roth account. The Notice updates the prior safe harbor explanations in Notice 2020-62 to reflect legislative changes enacted by the SECURE 2.0 Act of 2022 (SECURE 2.0) and related changes in the law made after August 6, 2020.

These modifications are responsive to a recommendation from the U.S. Government Accountability Office (U.S. GAO) that rollover explanations be clearer and more comprehensive for recipients. The updated text also addresses tax law changes involving the exceptions to the 10% additional tax on early distributions, adjustments to required minimum distribution (RMD) rules including the increased age for required beginning dates, surviving spouse elections and other distribution rules affected by recent statutory developments. The notice clarifies how rollover eligibility and mandatory withholding rules apply under SECURE 2.0 to distribution categories, including emergency personal expense distributions and domestic abuse victim distributions.

Plan administrators may use the safe harbor explanations as issued or omit sections that do not apply to a particular plan’s design. If a participant is eligible to receive eligible rollover distributions from both a designated Roth and a non-Roth account, both safe harbor explanations must be provided. While use of the safe harbor language ensures compliance with Sec. 402(f), plan administrators may provide alternative explanations that meet the disclosure requirements.

Annual IRS Advisory Council Report Released

The Internal Revenue Service Advisory Council (IRSAC) released its 2026 annual Public Report (Report) offering recommendations for various issues affecting IRS operations, taxpayer service, compliance and administrative policy. The Report emphasized ongoing IRS modernization efforts, persistent resource constraints and the vital role of effective communication and digital services.

IRSAC acknowledges IRS progress in its strategic transformation, but stresses that consistent funding, workforce stability and efficient digital tools remain foundational to long-term success. IRSAC’s Report reflects insights from tax professionals, industry representatives, academics and other stakeholders who interact directly with IRS systems and taxpayers.

In Issue Two of the Report, IRSAC focuses on public understanding of the IRS’s mission and operations. The Report notes that confusion about the IRS’s role remains widespread and contributes to mistrust and misinformation. IRSAC emphasizes that many taxpayers incorrectly believe the IRS creates tax law rather than administers the laws enacted by Congress, and it recommends a more proactive approach to public education. Specifically, IRSAC urges the IRS to strengthen public-facing educational initiatives and expand community outreach through digital channels. The recommendation also urges the IRS to develop clear messaging campaigns to address recurring falsehoods, including misconceptions about enforcement priorities and the use of taxpayer data. The Report stresses that restoring public trust will require sustained and intentional communication rather than occasional reactive responses.

The Report also addresses shortfalls in the IRS’s overall digital presence. In Issue Three, IRSAC notes that many IRS webpages remain difficult to navigate, lack consistent structure and fail to cross-reference or link to related guidance. To improve accessibility and reduce reliance on call centers, the Report recommends standardizing webpage formats, enhancing search functionality, improving mobile usability and consolidating outdated or duplicative content. IRSAC suggests that meaningful progress in this area would have an immediate impact on efficiency, especially during peak filing seasons.

Issue Five of the IRSAC Report focuses on online tools used by taxpayers and practitioners. Although IRSAC acknowledges recent improvements, the Report points out that many digital services still require excessive authentication steps and provide limited visibility into account activity. IRSAC recommends streamlining login and verification processes while maintaining security, expanding online account functionality, integrating business and individual account tools and enabling more transactions to be completed digitally. These changes are essential to reducing administrative burdens and improving the overall taxpayer experience.

The 2026 IRSAC Report underscores the importance of credible communication, modern digital services and simplified taxpayer interactions. These recommendations support the broader transformation goals outlined in the IRS’s strategic operating plan as the agency works to strengthen trust, compliance and long-term administrative capacity.

Applicable Federal Rate of 4.6% for February: Rev. Rul. 2026-3; 2026-6 IRB 1 (15 January 2026)

The IRS has announced the Applicable Federal Rate (AFR) for February of 2026. The AFR under Sec. 7520 for the month of February is 4.6%. The rates for January of 4.6% or December of 4.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2026, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”