Freedom Tax Service

The overtime deduction is a new, temporary federal income tax provision (effective for tax years 2025-2028) that allows eligible workers to deduct the "premium portion" of their qualified overtime pay from their federal taxable income.
This is a deduction from your total income when you file your annual tax return (e.g., on Form 1040 using Schedule 1A), not an exemption from taxes withheld from each paycheck. Overtime wages remain subject to federal income tax withholding, as well as Social Security and Medicare payroll taxes.
Key Details of the Overtime Deduction
Deductible Amount: The deduction applies only to the "extra half" of "time-and-a-half" pay required under the federal Fair Labor Standards Act (FLSA) for hours worked over 40 in a workweek.
Example: If your regular rate is $20/hour, your overtime rate is $30/hour. Only the $10/hour premium is eligible for the deduction.
Maximum Deduction: The maximum annual deduction is $12,500 for single filers and $25,000 for married couples filing jointly.
Income Limits: The deduction begins to phase out for taxpayers with a Modified Adjusted Gross Income (MAGI) over:
$150,000 for single filers.
$300,000 for married couples filing jointly.
Eligibility: It is primarily for non-exempt employees (usually hourly workers) who receive a W-2 form and whose overtime meets the federal FLSA standard. Overtime required only by state law or collective bargaining agreements generally does not qualify.
How to Claim:
For 2025 Taxes (filed in early 2026): Since W-2 forms were not initially updated, you may need to use pay stubs to calculate your qualified overtime compensation (e.g., dividing total time-and-a-half overtime pay by 3). The IRS has provided transition relief and guidance on how to report this.
For 2026 Taxes (filed in early 2027) and beyond: Employers are expected to report the qualified overtime amount in Box 12 of your W-2 using code "TT".
Availability: This deduction can be claimed even if you take the standard deduction; you do not need to itemize your deductions.