For the 2026 filing season (returns filed in 2026 for the 2025 tax year), the One, Big, Beautiful Bill Act introduces a brand-new federal tax deduction that lets many workers deduct a portion of their overtime income from taxable income — meaning some overtime pay won’t be taxed at all. (IRS)
This unprecedented deduction applies for tax years 2025 through 2028. (U of I Tax School)
What Is the “Overtime Tax Deduction”?
Under the OBBBA, individuals may claim a deduction for qualified overtime compensation — basically the extra pay they receive beyond their regular rate when working overtime. (IRS)
How It Works
- Qualified overtime compensation is generally the premium portion of overtime pay — for example, the extra half-time you receive on “time-and-a-half” wages. (IRS)
- Only the excess over your regular hourly rate is deductible. (IRS)
- You must claim this deduction on your federal income tax return when filing for tax year 2025. (IRS)
This is not a credit — it reduces your taxable income on your Form 1040. (IRS)
Maximum Deduction Limits (Important!)
For tax year 2025:
| Filing Status | Max Overtime Deduction |
|---|---|
| Single | $12,500 |
| Married Filing Jointly | $25,000 |
These amounts phase out once your modified adjusted gross income (MAGI) exceeds certain thresholds:
- $150,000 for single filers
- $300,000 for joint filers (IRS)
Step-by-Step: Calculating Your Overtime Deduction for 2025
1. Determine Your Qualified Overtime Pay
You need to identify just the overtime premium — not total overtime pay. Here’s how:
- If your employer separately reports your overtime premium: use that total. (IRS)
- If not, use IRS guidance methods (for example, dividing total overtime compensation by the factor implied by “time-and-a-half” pay to isolate the premium). (IRS)
These methods help when Forms W-2 and 1099 do not include separate boxes for overtime pay for the 2025 tax year. (IRS)
2. Apply the Deduction Limit
Once you know the qualified overtime total:
- Cap it at $12,500 (single) or $25,000 (joint). (IRS)
- If you exceed that amount, deduct only up to the cap.
3. Account for Income Phase-Outs
If your MAGI is above:
- $150,000 (single), or
- $300,000 (joint),
your deduction is reduced incrementally. (IRS)
The IRS guidance (Notice 2025-69) explains how to calculate the phase-out amount. (IRS)
Why Employers’ Information Reporting Matters (and the 2025 Transition)
For 2025 only, employers aren’t required to show qualified overtime separately on Form W-2 or Form 1099. (IRS)
That means:
- Taxpayers must track overtime hours and pay personally.
- Optionally, employers may provide supplementary info (such as in Box 14) to help employees prepare tax returns. (ADP)
Example Calculation
Scenario:
- A single worker earns $8,000 in overtime pay in 2025.
- Their overtime is at time-and-a-half.
Step 1: Determine qualified overtime premium.
- “Half-time” portion: $8,000 ÷ 3 ≈ $2,667 in qualified overtime. (IRS)
Step 2: Apply deduction limits.
- $2,667 < $12,500 cap → full amount deductible.
So this taxpayer would deduct $2,667 from taxable income on their 2025 return.
Key Takeaways
✅ This is a NEW deduction for qualified overtime, effective for tax years 2025–2028. (U of I Tax School)
✅ Workers can reduce taxable income by the overtime premium amount — up to $12,500 or $25,000. (IRS)
✅ The deduction phases out at higher incomes. (IRS)
✅ For 2025 only, taxpayers may need to piece together info themselves because Forms W-2/1099 won’t reflect it yet. (IRS)
Conclusion: A Game-Changer for Workers in 2025
The overtime deduction under the One, Big, Beautiful Bill Act represents a major shift in federal income tax policy, helping hourly workers keep more of their earnings by excluding part of their overtime pay from taxable income. (IRS)
Taxpayers should prepare by:
- Keeping detailed overtime pay records
- Understanding their MAGI and deduction limits
- Consulting updated IRS guidance (Notice 2025-69) when preparing returns