Intro
The new “No Tax on Overtime” rule helps workers save money when they earn extra pay. It lets you deduct the overtime amount from your income, which can lower your tax bill. You do not need to itemize to get it, and it works even if you use the standard deduction. The IRS will share more details later, but the main idea is clear. You can deduct up to $12,500 in overtime pay, or $25,000 if you file a joint return. And as your income goes up, the deduction slowly goes down. This rule gives many workers a chance to keep more of the money they earned.
Tax Tip
If you earn overtime, make sure your employer shows your overtime pay separately on your W-2. This helps you claim the new deduction and lower your taxable income fast. (This is not a requirement of the employer per Notice 2025-69. There will be no modifications to any income reporting forms.)
If you earn overtime, it likely won’t be shown separately on your W-2—Notice 2025-69 doesn’t require employers to change wage reporting forms. To claim the overtime deduction, you’ll use your paystubs/time records to calculate your qualifying overtime amount under 29 U.S.C. § 207. Generally, only the overtime premium qualifies: up to ½ of your regular hourly rate for each overtime hour. So if you’re paid time-and-a-half, the qualifying amount is the “extra” ½. If you’re paid double time, your qualifying amount is still limited to ½ (not the full extra amount).
Overview of Deduction
Starting in 2025, the new “No Tax on Overtime” rule gives workers a tax break on the extra pay they earn from overtime. If a worker receives overtime pay required under federal labor law, they can deduct that amount from their income on their tax return.
The most someone can deduct each year is $12,500, or $25,000 for married couples filing together.
The deduction starts to go down if someone’s income is over $150,000, or $300,000 for married filing jointly. For every $1,000 over that limit, the deduction goes down by $100, until it reaches zero.
- For single filers, the “No Tax on Overtime” amount decreases gradually after exceeding $150,000. As a result, they can still get a reduced deduction until their modified adjusted gross income reaches $400,000.
- Additionally, for married filing jointly, if modified adjusted gross income exceeds $300,000, you can still get a reduced deduction. This continues until your modified adjusted gross income reaches $550,000.
Overtime pay must be listed on the worker’s W-2 or on the pay statement they receive. The overtime must be actual overtime pay, not tips or other special pay. Also, the worker must list their Social Security number on their tax return to get this deduction.
You do not need to itemize to get this deduction.
The “No Tax on Overtime” deduction is also completed on Schedule 1-A, where the IRS walks through your qualified overtime compensation and any income-based phaseout. Once the final amount is determined, it is carried to Form 1040, line 13b as an additional deduction.
This deduction lowers your taxable income, but it does not reduce your AGI. Since it isn’t an adjustment to income, it won’t help with AGI-based credits, phaseouts, or IRMAA calculations. You receive the tax benefit directly by reducing the income the IRS taxes, even when you don’t itemize.
This tax break ends after December 31, 2028.
Relevant Posts
Sources
- Referenced H.R.1 – One Big Beautiful Bill Act Sec. 70202: https://www.congress.gov/bill/119th-congress/house-bill/1/textIRS Website
- Referenced site: https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors
- Referenced site: https://www.irs.gov/draft-tax-forms?items_per_page=200&find=Individual%20Income%20Tax%20Return&order=posted_date&sort=desc
- Referenced site: https://www.irs.gov/draft-tax-forms?items_per_page=200&find=1-A&order=posted_date&sort=desc
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