Does Arizona Tax Overtime in 2026?
No - Arizona subtracts the federal overtime premium deduction. HB 4168 (Laws 2026, Chapter 140, approved June 13, 2026) added an Arizona subtraction for qualified overtime compensation deducted under IRC §225, for taxable years beginning after December 31, 2024. At Arizona's 2.5% flat rate, the full $12,500 federal cap is worth about $313 in Arizona tax.
How Arizona's Overtime Tax Treatment Works
Arizona's starting point: Form 140 begins on line 12 with federal adjusted gross income. The federal overtime premium deduction is figured on Schedule 1-A after AGI, so by itself it would not reduce Arizona income.
The state subtraction: Section 15 of HB 4168 added paragraph 32 to A.R.S. 43-1022: a subtraction for "the amount of qualified overtime compensation received during the taxable year that is deducted under section 225 of the Internal Revenue Code," to the extent not already excluded. Section 35 makes it retroactive to taxable years beginning after December 31, 2024.
Claiming it: for 2025, the subtraction is entered on Form 140, page 6, line V (Other Adjustments), using ADOR's worksheet. Because it is an adjustment to income, you must file Form 140 rather than Form 140A or 140EZ.
Federal Overtime Deduction Quick Reference
| Detail | Value |
|---|---|
| IRC Section | §225 (OBBBA) |
| Maximum deduction | $12,500 overtime ($25,000 MFJ) |
| Deduction type | Above-the-line (Schedule 1-A) |
| FICA still applies? | Yes (Social Security 6.2% + Medicare 1.45%) |
| MFS eligible? | No (MFJ or Single/HoH only) |
| Effective dates | Jan 1, 2025 – Dec 31, 2028 |
| Arizona treatment | Conforms |
| What qualifies? | Overtime premium only (the 0.5x above regular rate), FLSA non-exempt employees |
Worked Examples Comparing Federal and Arizona Treatment
Example 1: Warehouse worker with $8,000 in overtime premium (single filer, 12% federal bracket)
Qualifying overtime premium: $8,000
Overtime deduction claimed: $8,000 (capped at $12,500)
Estimated federal tax savings: $960.00
Arizona return:
State tax savings from deduction: $200.00
Arizona's own subtraction (A.R.S. 43-1022, added by HB 4168) removes the same $8,000 from Arizona income, saving about $200 at the 2.5% flat rate. For 2025 the subtraction goes on Form 140, page 6, line V.
Example 2: Nurse at the single-filer cap, $12,500 deducted (single filer, 22% federal bracket)
Qualifying overtime premium: $12,500
Overtime deduction claimed: $12,500 (capped at $12,500)
Estimated federal tax savings: $2,750.00
Arizona return:
State tax savings from deduction: $312.50
Arizona's subtraction follows the amount deducted federally, so it is capped at $12,500 as well. At 2.5%, that is about $313 of Arizona tax saved.
Arizona Notes
Flat 2.5% rate: every dollar subtracted saves 2.5% of Arizona tax, so the value is easy to estimate.
Premium only: if you earn $24 an hour and $36 for overtime hours, only the $12 premium per hour is deducted federally and subtracted in Arizona. Employers report qualified overtime on Form W-2, box 12, code TT starting with 2026 wages.
Time limit: the federal overtime deduction runs through 2028; Arizona's subtraction follows the federal amount.
Senior deduction too: HB 4168 also added a subtraction for the federal senior deduction (IRC §151(d)(5)(C)), with the same retroactive start.
Related Tools
- No Tax on Overtime Calculator - calculate your federal overtime deduction
- Arizona Tax Guide - full state tax overview
- Arizona Paycheck Calculator
- Does Arizona Tax Tips?
- W-2 Code TP: Tips Reporting Guide
- W-2 Code TT: Overtime Reporting Guide
- All 51 States: Tips & Overtime Tax Map