If you earn overtime pay at work, a tax deduction created by the One Big Beautiful Bill Act could meaningfully reduce your federal income tax bill. The no-tax-on-overtime provision allows eligible workers to deduct a portion of their qualified overtime compensation from federal taxable income, for tax years 2025 through 2028. Here is everything you need to know about who qualifies, how the deduction is calculated, and how to claim it when you file.
What Is the No-Tax-on-Overtime Deduction?
The no-tax-on-overtime deduction is a federal income tax deduction created by the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025. It allows eligible employees to deduct the "overtime premium" portion of their overtime pay from their federal taxable income. The deduction applies to tax years 2025 through 2028 and is set to expire after December 31, 2028 unless Congress extends it.
The deduction works above the line, meaning you can claim it whether you take the standard deduction or itemize on Schedule A. It reduces your adjusted gross income directly.
One important distinction: this is a deduction, not an exemption. Your employer still withholds federal income tax on overtime pay when you are paid. You recover the tax benefit when you file your annual return by claiming the deduction on Schedule 1-A.
How Much Can You Deduct?
The deduction is capped at $12,500 per return. Married couples filing jointly can deduct up to $25,000 combined if both spouses have qualifying overtime compensation.
What you are actually deducting is the "overtime premium" -- the extra amount you earned above your regular rate for working beyond 40 hours in a workweek. Under the Fair Labor Standards Act (FLSA), overtime must be paid at 1.5 times your regular rate. The overtime premium is that extra 0.5x portion on top of your regular rate.
For example: say your regular hourly rate is $20 per hour. For overtime hours, you earn $30 per hour. The overtime premium is $10 per overtime hour -- the amount above your regular pay. Only that $10 per hour is deductible, not the full $30.
If you worked 200 overtime hours at a $10 premium, your qualifying overtime deduction would be $2,000. If you worked 1,300 overtime hours at the same premium, your qualifying amount would be $13,000 -- but the deduction caps at $12,500 per return.
Who Qualifies for the Deduction?
To claim the no-tax-on-overtime deduction, you must meet all of the following requirements:
- You must be a W-2 employee covered by the Fair Labor Standards Act. Independent contractors and self-employed individuals do not qualify.
- The overtime must be required under the FLSA -- meaning hours worked beyond 40 in a workweek at 1.5x your regular rate.
- You must have a valid Social Security number.
- You cannot use the Married Filing Separately filing status.
- Your modified adjusted gross income (MAGI) must fall below the phase-out thresholds (see below).
Rail carrier employees and certain other exempt categories are excluded. Salaried employees who are exempt from FLSA overtime rules also do not qualify, even if their employer voluntarily pays them overtime.
Income Phase-Out Limits
The deduction phases out at higher income levels. The phase-out begins at $150,000 MAGI for single filers and $300,000 for married filing jointly. Above those thresholds, the deduction is reduced and eventually eliminated. If your income is well above these levels, you may receive only a partial deduction or none at all.
How Do You Find Your Qualifying Overtime Amount?
Starting with tax year 2026, employers are required to separately report qualified overtime compensation in Box 12 of your W-2 using Code "TT." This is the number you use when calculating your deduction. If your W-2 shows a Code TT amount, that is your employer's calculation of your qualifying overtime premium for the year.
For 2025 returns (filed in 2026), reporting was handled differently. Because the OBBBA was signed mid-year on July 4, 2025, payroll systems were not ready to track overtime separately from day one. The IRS provided transitional relief and did not penalize employers who failed to report the Code TT amount separately on 2025 W-2s. In that case, employees could use IRS Notice 2025-69 methods to estimate their qualifying overtime deduction based on their own pay records.
If your employer did not report a Code TT figure and you believe you have qualifying overtime, keep your pay stubs and work with a tax professional or use the IRS calculation worksheet to estimate your premium amount.
How to Claim the Deduction on Your Tax Return
The no-tax-on-overtime deduction is claimed on Schedule 1-A (Form 1040), titled "Additional Deductions." This is a new form created specifically for the OBBBA deductions including overtime, tips, and car loan interest.
Here is the basic process:
- Gather your W-2 and look for the Code TT amount in Box 12. This is your qualifying overtime figure.
- Complete Schedule 1-A, Part II, using the amount from your W-2.
- If your income is above the phase-out threshold, complete Part I of Schedule 1-A to determine your reduced deduction amount.
- The deduction flows from Schedule 1-A to Schedule 1 and reduces your adjusted gross income on Form 1040.
The deduction is claimed on the return for the year in which the overtime was earned. If you worked overtime throughout 2025, you claim it on your 2025 tax return filed in 2026.
Does It Affect State Taxes?
Whether the overtime deduction reduces your state income taxes depends on your state's tax conformity laws. States that use "rolling conformity" -- meaning they automatically adopt federal tax law changes -- will generally allow the deduction. States with "static conformity" that were conformed to a pre-OBBBA version of the tax code may not recognize the deduction, meaning you could still owe state income tax on the full amount of your overtime pay. Several states were updating their conformity rules during 2026 legislative sessions. Check your state's department of revenue or consult a tax professional to confirm how your state handles the deduction.
Worked Dollar Example
Say you are a single filer with a regular hourly rate of $25. You worked 300 overtime hours in 2025, earning $37.50 per hour for those hours. Your overtime premium per hour is $12.50 (the extra 0.5x above your regular rate).
- Total overtime premium: 300 hours x $12.50 = $3,750
- Deduction cap: $12,500 (your qualifying amount is well below the cap)
- Your no-tax-on-overtime deduction: $3,750
- If you are in the 22% bracket, this deduction saves you approximately $825 in federal income tax.
Now say you worked 1,200 overtime hours at the same rate, putting your total overtime premium at $15,000. The deduction caps at $12,500, so you deduct $12,500. At the 22% bracket, that saves you approximately $2,750 in federal income tax.
How It Compares to the No-Tax-on-Tips Deduction
The no-tax-on-overtime deduction and the no-tax-on-tips deduction are both OBBBA provisions, both claimed on Schedule 1-A, and both temporary through 2028. The key differences are who qualifies and what amount is deductible. The tips deduction covers up to $25,000 in qualified tip income and applies to workers in traditionally tipped occupations. The overtime deduction covers up to $12,500 in overtime premium pay and applies to FLSA-covered hourly employees. Some workers may qualify for both if they earn both tips and overtime.
Key Facts Summary
- Deduction amount: up to $12,500 per return ($25,000 married filing jointly)
- What is deductible: the overtime premium -- the extra 0.5x above your regular rate
- Who qualifies: W-2 employees covered by the FLSA
- Who does not qualify: independent contractors, self-employed, FLSA-exempt salaried employees, rail carrier employees
- Years covered: 2025 through 2028
- Where to claim: Schedule 1-A, Part II
- Income phase-out: begins at $150,000 MAGI (single) / $300,000 (married filing jointly)
- W-2 reporting: Code TT in Box 12 starting with tax year 2026
If you earned significant overtime in 2025 and have not yet filed, or if you are planning ahead for 2026, make sure you are tracking your hours and working with a tax professional or using the IRS Schedule 1-A worksheet to calculate the exact deduction amount you are entitled to. The deduction can produce meaningful savings, especially for workers in trades, manufacturing, healthcare, and transportation who regularly log overtime hours.