Unless there is a change made subsequent to the new bill, the general rule is that a legal settlement for lost wages or unpaid wages is taxed just like the wages would have been. The IRS treats it as a replacement for income you should have earned.
Tax implications of settlements and judgements - this contains links to the relevant Internal Revenu....
The "No Tax on Overtime" provision allows eligible employees to deduct up to $12,500 of "qualified overtime compensation" from their federal taxable income.
To be "qualified," the overtime must be earned during the 2025-2028 tax years and be for the "premium portion" of your overtime pay (the extra half of your time-and-a-half rate). Since your settlement is for overtime worked in 2020 and 2021, it does not meet this requirement.
IRS Pub 525 - General resource for reference on taxable and non-taxable income.
Hope this clarifies it a bit!
Cindy
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