How does the "No Tax on Overtime" deduction work for the 2025 tax year, and what are the income limits?
The One, Big, Beautiful Bill Act (OBBBA) also introduced a "No Tax on Overtime" deduction for tax years 2025 through 2028. Eligible workers can deduct up to $12,500 of qualified overtime compensation from their federal taxable income, reducing their overall tax bill on overtime earnings.
### What Counts as Qualified Overtime?
Only overtime that is required and paid under the Fair Labor Standards Act (FLSA) qualifies. This is the "time-and-a-half" (1.5× your regular rate) premium paid to non-exempt hourly and salaried employees when they work more than 40 hours in a workweek.
Important: Only the overtime premium portion (the extra 0.5× your regular rate) is deductible — not your full overtime pay. If your regular hourly rate is $20 and you earn $30/hr for overtime, only the $10 premium portion per overtime hour qualifies.
| Scenario | Regular Pay | Overtime Premium (Deductible) |
|---|---|---|
| :--- | :--- | :--- |
| Regular rate $20/hr, 10 OT hours | $200 (normal) | $100 ($10 × 10 hrs) |
### Income Phase-Out Limits
The deduction phases out for higher-income taxpayers:
- Single/Head of Household: Phase-out begins at MAGI of $150,000 — the deduction is reduced by 10 cents for every dollar above the threshold.
- Married Filing Jointly: Phase-out begins at MAGI of $300,000.
Example: A single filer with MAGI of $155,000 has excess MAGI of $5,000. Their deduction is reduced by $500 (10% × $5,000).
### Maximum Deduction Limit
The total deduction for overtime compensation (the premium element) is capped at $12,500 per taxpayer per year. Combined with the tip deduction, the total cap for both tips and overtime together is $12,500 ($25,000 for tips alone; $12,500 for overtime; each has its own separate cap but they share the same Schedule 1-A).
### How to Claim
Report your qualified overtime deduction on Schedule 1-A (the same form used for the tip deduction), Part II. Employers are required to report qualifying overtime compensation on your Form W-2 starting with the 2025 tax year to facilitate accurate claims.
The IRS has announced transition relief for 2025 while employers adapt to new reporting requirements. If your Form W-2 does not break out overtime, you may be able to document qualifying overtime through pay stubs and records. Consult IRS guidance (FS-2025-03) for the transition period rules.
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