New Federal Tax Deduction: No Tax on Overtime (2025–2028)

We have received questions regarding the new federal “No Tax on Overtime” deduction, which is effective for tax years 2025 through 2028. This provision allows eligible taxpayers to deduct a portion of their overtime pay when calculating federal income tax.

Under this law, only qualified overtime compensation is eligible for the deduction. Qualified overtime generally refers to hours worked beyond 40 in a workweek, and only the premium portion of overtime pay qualifies. In most cases, overtime is paid at time-and-a-half, and only the additional “half” portion above the regular hourly rate may be deducted. Regular wages remain fully taxable.

The deduction is also subject to annual dollar limits. The maximum deduction is $12,500 for single filers and $25,000 for married taxpayers filing jointly, even if the premium portion of overtime pay exceeds these amounts. These caps apply before considering income-based phase-outs.

In addition to the dollar caps, the deduction is limited by income using Modified Adjusted Gross Income (MAGI). MAGI begin with Adjusted Gross Income and adds back certain exclusions and deductions, such as tax-exempt interest, foreign earned income exclusions, student loan interest deductions, and non-taxable Social Security benefits. The deduction begins to phase out when MAGI exceed $150,000 for single filers and $300,000 for married taxpayers filing jointly. As income rises above these thresholds, the allowable deduction is gradually reduced. Once income reaches the top of the phase-out range, the deduction is fully eliminated, regardless of the amount of overtime worked.

It is important to note that this deduction reduces federal income tax only. Overtime wages remain subject to Social Security and Medicare taxes, as well as any applicable state or local income taxes. This provision does not affect payroll tax withholding.

To claim the deduction, overtime compensation must be properly documented by the employer. In many cases, the deductible overtime premium may not be separately identified on Form W-2. Taxpayers should retain final pay stubs and payroll records that clearly identify overtime hours and rates. Married taxpayers generally must file jointly to claim the deduction.

The deduction is available to both taxpayers who itemize deductions and those who claim the standard deduction, as it is treated as an adjustment to income rather than an itemized deduction.

Because eligibility depends on income levels, dollar caps, and proper payroll reporting, taxpayers should review their overtime compensation carefully and consult with their tax advisor to determine the actual benefit available under this provision.

If you have questions about how the No Tax on Overtime deduction may apply to your situation, or if you would like assistance in reviewing your payroll documentation, please contact our office.