Can I deduct my overtime pay under the new 'no tax on overtime' rule for 2025?

Yes, the 'No Tax on Overtime' deduction is available for tax year 2025 under the One Big Beautiful Bill Act (OBBBA), signed into law July 4, 2025. But there are specific rules about exactly what portion of overtime qualifies.

What you can deduct:

You can deduct the extra "half" portion of your time-and-a-half overtime pay — specifically the premium above your regular hourly rate — as required under the Fair Labor Standards Act (FLSA). For example, if your regular rate is $20/hr and you earn $30/hr for overtime, the $10/hr premium is the deductible portion.

Limits:

• Maximum annual deduction: $12,500 per taxpayer ($25,000 for married filing jointly).
• Phases out for MAGI over $150,000 (or $300,000 for joint filers).

Who qualifies:

• W-2 employees and certain 1099 workers who receive overtime pay as defined under FLSA.
• The overtime must be reported on a W-2, Form 1099, or other IRS-specified statement.
• You must include your Social Security Number on your return; married taxpayers must file jointly.
• Deduction is available whether you itemize or take the standard deduction.

Who does NOT qualify:

• Salaried employees who receive bonuses that happen to be labeled "overtime" but aren't FLSA-required overtime premium pay.
• Self-employed individuals whose extra income comes from working more hours (no FLSA overtime obligation applies).

Practical example:

If you earned $8,000 in FLSA overtime premium pay in 2025 and your MAGI is $120,000, you could potentially deduct the full $8,000, reducing your taxable income by that amount.

The IRS is providing transition relief for 2025 while final reporting requirements are finalized. This deduction is effective for 2025 through 2028.