How the overtime tax deduction works
For tax years 2025 through 2028, workers can deduct qualified overtime compensation from their federal taxable income — up to $12,500 per year, or $25,000 for married couples filing jointly. The deduction was created by the One Big Beautiful Bill Act signed in July 2025 and applies whether or not you itemize.
The most misunderstood part: only the overtime premium counts — the extra "half" of time-and-a-half that the Fair Labor Standards Act (FLSA) requires. Your regular rate for those hours stays fully taxable, and so do Social Security, Medicare and state taxes on all of it.
Income limits and phase-out
The deduction starts phasing out above a modified adjusted gross income (MAGI) of $150,000 ($300,000 joint). It is reduced by $100 for every $1,000 above the threshold — reaching zero at $275,000 ($550,000 joint).
Who qualifies
- Hourly and other non-exempt employees receiving FLSA-required overtime.
- From tax year 2026, employers must report qualified overtime separately on the W-2 — for 2025 returns, employers could use reasonable estimates.
- Exempt (salaried) employees without FLSA overtime, and overtime paid only under state law or union contracts beyond FLSA requirements, generally do not qualify.
Sources
IRS: Q&A on the qualified overtime deduction · OBBBA deductions overview · What to know about the deduction