How do I claim the new no-tax-on-overtime deduction for 2025?

The One, Big, Beautiful Bill Act (OBBBA) introduced a new above-the-line deduction for qualified overtime compensation, effective for tax years 2025 through 2028. This means eligible workers can deduct overtime pay from their gross income, reducing their taxable income even if they take the standard deduction.

Who qualifies?

• W-2 employees who received overtime pay required under the Fair Labor Standards Act (FLSA) (time-and-a-half for hours worked over 40 per week)
• Eligible workers include hourly employees and salaried employees who are non-exempt under FLSA
• High earners face a phaseout: the deduction begins phasing out at $150,000 for single filers and $300,000 for married filing jointly

How to calculate it:

For 2025, your W-2 may not separately identify overtime pay in a dedicated box. The IRS issued Notice 2025-69 with guidance on how to calculate the deduction yourself:

• Review your pay stubs and calculate total FLSA-required overtime paid during 2025
• If your employer used Box 14 of Form W-2 to report overtime, use that figure directly
• If no separate reporting exists, reconstruct the amount from payroll records or your employer's HR portal

How to claim it:

The deduction is claimed as an above-the-line deduction on Schedule 1 (Form 1040). The IRS updated the form for the 2026 filing season to include a specific line. Report all W-2 wages normally, then take the deduction separately.

Key limits:

• Capped at the actual amount of FLSA overtime pay received
• Voluntary overtime or bonuses not required by FLSA do not qualify
• Self-employment income is not eligible — this deduction applies to W-2 employment only
• The phaseout reduces the deduction dollar-for-dollar above the income threshold