Summer is here, and for thousands of hourly employees across Michigan, that means peak production season and plenty of extra hours on the clock. Whether you are putting in shifts at Ford in Dearborn, GM in Warren, Stellantis in Sterling Heights, or working long hours in healthcare across Wayne, Macomb, and Oakland counties, your paycheck might look different this year. Thanks to federal tax changes under the One Big Beautiful Bill Act (OBBBA), many hourly workers now have access to a new deduction on their overtime pay. If you have been searching for information on the Michigan auto worker overtime tax deduction 2026, the details below explain exactly how it works, what it is worth, and where workers most often get it wrong. For help applying these rules to your own return, an experienced Michigan tax attorney can review your pay records and filing status with you.
Signed into law on July 4, 2025, the OBBBA created a federal income tax deduction for certain overtime pay. The deduction is available for tax years 2025 through 2028, and under current law it sunsets after 2028 unless Congress extends it.
Here is the part that surprises most workers. The deduction does not apply to all of your overtime pay. It applies only to the premium portion, which is the extra half of time-and-a-half required by the Fair Labor Standards Act (FLSA). In other words, if your regular rate is $30 an hour and you earn $45 an hour for overtime, only the extra $15 qualifies. The first $30 does not.
The maximum deduction is capped by filing status:
Single filers can deduct up to $12,500 of qualified overtime pay.
Married couples filing jointly can deduct up to $25,000, and that limit is a combined cap for both spouses, not a per-person amount.
You claim the deduction on the new IRS Schedule 1-A, and you can take it whether or not you itemize. It sits on top of your standard deduction rather than replacing it. For 2026, the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly, so most hourly workers will use the standard deduction and still claim their qualified overtime on top of it.
One more point that trips people up. This deduction does not change your paycheck. Your employer still withholds federal income tax, Social Security, and Medicare from your overtime exactly as before. The benefit shows up when you file your return, not in your weekly check.
Because only the premium counts, the math matters. The simplest way to find your qualified amount is to take your total time-and-a-half overtime pay for the year and divide it by three. That isolates the half-time premium, which is the deductible piece.
Starting with the 2026 tax year, your employer is required to report your qualified overtime separately. Look for the amount labeled in Box 14 of your Form W-2, often shown as QUAL OT. For the 2025 tax year, the IRS gave employers transition relief, so if your 2025 W-2 does not break the figure out, you can use your pay stubs and year-end earnings statements to calculate it yourself.
Keep in mind what does not count. Overtime paid only because of a state law, a union contract, or a company policy that goes beyond what the FLSA requires is not qualified overtime. Neither are shift differentials, weekend premiums, or holiday pay when you have not worked more than 40 hours in that week. The deduction is tied specifically to the FLSA over-40 rule.
To claim the Michigan auto worker overtime tax deduction 2026, you must be a worker covered by, and not exempt from, the FLSA. The law is built for non-exempt employees who are paid time-and-a-half for hours worked over 40 in a workweek.
If you are a salaried supervisor classified as exempt or an independent contractor, you do not qualify. But if you are an hourly production line worker, a skilled tradesperson, a material handler, or a floor nurse picking up extra weekend shifts, you are exactly the kind of worker this provision was written for. You also need a Social Security number valid for employment, and married workers must file jointly to claim it.
The peak period for overtime questions tends to fall between June and July, when plants run hardest, which makes right now a good time to review your pay stubs. Confirming that your employer is tracking your regular hours and your overtime hours correctly will save you headaches when you file next winter.
The overtime deduction phases out for higher earners. It begins to shrink once your modified adjusted gross income (MAGI) passes $150,000 for single filers or $300,000 for joint filers. Above those thresholds, the deduction is reduced by $100 for every $1,000 of income over the line.
For most hourly auto and healthcare workers, that ceiling is well unreachable, so the full deduction is available. But two-income households with heavy overtime should run the numbers, because combined wages can climb faster than people expect during a strong production year.
To see how the rules actually play out, here is a simple illustration.
Mark is a single, full-time hourly worker at the Stellantis Sterling Heights Assembly Plant. His regular rate is $30 an hour, so his overtime rate is $45 an hour. In 2026, demand is high, and he works 400 overtime hours, earning $18,000 in total overtime pay.
It is tempting to assume Mark can deduct the full $12,500 cap. He cannot. Only the premium portion qualifies. The premium is the extra $15 an hour, so his qualified overtime is $15 multiplied by 400 hours, which equals $6,000. You reach the same number by dividing his $18,000 of time-and-a-half pay by three.
Mark’s deduction is therefore $6,000, comfortably under the $12,500 cap, and his income is far below the phaseout. He still reports all of his wages, then deducts the $6,000 of qualified overtime on Schedule 1-A on top of his $16,100 standard deduction. The result is real money back in his pocket, just not the inflated figure that some headlines suggest.
This example is illustrative only and is not a prediction of any specific tax result. Prior results do not guarantee a similar outcome.
If you put your extra earnings toward a new vehicle, a second OBBBA provision may help. For tax years 2025 through 2028, you can deduct up to $10,000 per year of interest on a qualifying car loan, even if you do not itemize. Like the overtime deduction, it is claimed on Schedule 1-A.
The rules are specific, and missing one of them disqualifies the deduction:
The loan must be taken out after December 31, 2024, and secured by the vehicle.
The vehicle must be new, purchased for personal use, and have a gross vehicle weight rating under 14,000 pounds.
Final assembly must occur in the United States. You can confirm this from the window sticker or by checking the VIN.
You must report the VIN on your return each year you claim the deduction.
The $10,000 cap applies per return, not per spouse. The deduction begins to phase out at $100,000 of MAGI for single filers and $200,000 for joint filers, and it is fully gone at $150,000 single or $250,000 joint. Because the law requires final assembly in the United States, it leans toward vehicles built in places like Detroit, Flint, and Lansing, which is good news for Michigan buyers shopping local product.
The federal government created these breaks, but Michigan does not automatically follow them. It is important to understand that state rules and federal rules often diverge.
Flat income tax rate. Michigan taxes income at a flat 4.25%, and it offers no state-level exemption for overtime. That means every dollar of your overtime is still subject to Michigan tax, even the premium portion you can deduct federally.
No matching state deduction. The OBBBA overtime and auto loan deductions are federal only. They do not reduce your Michigan taxable income.
Collection timelines differ. If you ever fall behind on taxes, the deadlines are not the same. The IRS generally has a 10-year Collection Statute Expiration Date (CSED) to collect a federal debt. The Michigan Department of Treasury generally has a 6-year collection statute from the date of assessment under MCL 205.27a.
Different forums for disputes. A disagreement over a Michigan assessment is handled by the Michigan Tax Tribunal, not the U.S. Tax Court.
Because state and federal jurisdictions follow separate playbooks, workers facing back taxes in both systems often benefit from professional guidance.
A deduction this visible draws attention. The IRS runs automated matching that cross-references your W-2 against what you claim, so overstating qualified overtime is an easy way to invite a notice. The single most common error, claiming the full overtime amount instead of just the premium, is exactly the kind of mismatch those systems are built to catch.
A few facts worth keeping in mind. The standard IRS audit window is 3 years from the date you file. If the IRS believes you understated your gross income by more than 25%, that window doubles to 6 years. Even with leaner staffing at the agency lately, automated enforcement has only grown sharper, not weaker.
If you receive a letter questioning your overtime deduction, do not panic. Solid documentation usually resolves it. Keep your pay stubs, W-2 forms, and any employment records that show your hourly, non-exempt status. Professional help with tax audits and appeals can ensure your records are organized and your deduction is presented correctly.
At Levy & Associates, our main office sits right in Lathrup Village, in the heart of the Detroit metro area. We understand the pressures on Michigan auto and healthcare workers because many of them are our neighbors and our clients.
Our team includes CPAs, licensed Michigan attorneys, and former IRS revenue officers, so we look at tax problems from both sides of the table. Whether you need help understanding your W-2 withholding, sorting out qualified overtime, responding to an audit, or resolving older state or federal tax debt, we work toward practical, reliable solutions. For taxpayers who cannot pay in full, options such as installment agreements and the IRS Offer in Compromise may be available, though acceptance always depends on your specific financial circumstances and is never guaranteed.
Please note that Levy & Associates handles civil tax matters only. We do not represent clients in criminal tax matters.
No. The OBBBA overtime deduction is a federal provision only. Michigan taxes your income at a flat 4.25% and offers no equivalent state exemption for overtime, so your overtime remains fully taxable at the state level.
Only the premium portion, which is the extra half of time-and-a-half pay. A quick way to estimate it is to divide your total time-and-a-half overtime for the year by three. The deduction is then capped at $12,500 for single filers and $25,000 for joint filers.
Beginning with the 2026 tax year, employers report it separately, usually in Box 14 of your W-2 labeled QUAL OT. For 2025, if it is not listed, you can calculate it from your pay stubs and year-end earnings statements.
Yes. It applies to any non-exempt worker covered by the FLSA who receives qualifying overtime, including nurses, medical assistants, and support staff across Oakland, Wayne, and Macomb counties.
No. Your employer continues to withhold federal income tax, Social Security, and Medicare from your overtime as usual. You claim the deduction when you file your return.
Provide documentation that proves your hourly, non-exempt status, such as pay stubs, W-2 forms, and employment agreements. Working with a qualified tax professional can help you organize and present that defense efficiently.
If you have questions about your W-2 withholding or need help resolving an IRS issue, the team at Levy & Associates is ready to help. Our attorneys, CPAs, and former IRS revenue officers understand how complex tax situations work because many of us worked on the IRS side of these cases. Call us at (877) 500-4930 or contact us online for a free consultation.
Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.
There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.