top of page
Search

Understanding the New Overtime Pay Deduction for Tax Years 2025 to 2028

Overtime pay often means extra income, but it also usually means higher taxes. Starting in 2025, a new federal tax deduction changes that for many workers. The Big Beautiful Bill Act, passed on July 4, 2025, introduces a temporary deduction that allows eligible taxpayers to exclude a portion of their qualified overtime pay from taxable income. This deduction applies through tax year 2028 and aims to ease the tax burden on workers who earn extra through overtime.


This post explains how the deduction works, who qualifies, how to calculate the deductible amount, and important rules to keep in mind. If you earn overtime pay, understanding this new deduction can help you keep more of your hard-earned money.





What Is the New Overtime Pay Deduction?


The new deduction allows workers to exclude part of their overtime pay from taxable income for tax years 2025 through 2028. It applies only to the premium portion of overtime pay—the extra amount earned above the regular hourly rate.


The deduction limits are:


  • $12,500 for Single filers, Head of Household, or Married Filing Separately

  • $25,000 for Married Filing Jointly


This means if you qualify, you can reduce your taxable income by up to these amounts based on your filing status, lowering your overall tax bill.



How to Determine Qualified Overtime Pay


Not all overtime pay counts equally toward this deduction. The key is how your overtime rate is calculated.


Time-and-a-Half Overtime


  • Workers earn 1.5 times their regular hourly rate.

  • The premium portion is the extra half of the regular rate.

  • The full premium counts as qualified overtime pay.


Example:

Regular rate: $20/hour

Overtime rate: $30/hour (1.5 × $20)

Premium portion: $10/hour ($30 - $20)

Qualified overtime pay = $10 per overtime hour


Double-Time Overtime


  • Workers earn 2 times their regular hourly rate.

  • The premium portion is the extra amount above regular pay.

  • Only half of the premium counts as qualified overtime pay.


Example:

Regular rate: $24/hour

Overtime rate: $48/hour (2 × $24)

Premium portion: $24/hour ($48 - $24)

Qualified overtime pay = $12 per overtime hour (50% of premium)



Who Is Eligible for the Deduction?


To claim the deduction, you must meet these conditions:


  • You receive qualified overtime pay as defined above.

  • Your Adjusted Gross Income (AGI) is below the phase-out threshold.

  • You file taxes as Single, Head of Household, Married Filing Separately, or Married Filing Jointly (with specific limits).


Income Phase-Out Limits


The deduction phases out gradually once your AGI exceeds:


  • $150,000 for Single filers, Head of Household, or Married Filing Separately

  • $300,000 for Married Filing Jointly


If your income is above these limits, the deduction amount decreases until it reaches zero.



Important Rules and Limitations


Only the First Portion of Overtime Pay Is Excluded


The deduction applies only to the first $12,500 (or $25,000 for joint filers) of qualified overtime pay. Any qualified overtime pay beyond these amounts remains taxable.


Overtime Pay Is Still Subject to Payroll Taxes


Even though part of your overtime pay is excluded from federal income tax, all overtime pay remains subject to Social Security and Medicare taxes. This means your paycheck will still reflect these payroll tax deductions.


Married Taxpayers Must File Jointly to Claim the Higher Limit


Married couples who want to claim the $25,000 deduction must file jointly. Filing separately limits the deduction to $12,500 per spouse.



How to Calculate Your Deduction


Follow these steps to estimate your deduction:


  1. Identify your regular hourly rate.

    • For time-and-a-half, use the full premium.

    • For double-time, use half the premium.

  2. Determine your overtime rate and premium portion.

  3. Calculate qualified overtime pay:

  4. Multiply qualified overtime pay per hour by the number of overtime hours worked.

  5. Apply the deduction limit based on your filing status.

  6. Check your AGI to see if the deduction phases out.


Example Calculation


Maria works as a nurse and earns $30/hour regularly. She receives time-and-a-half overtime pay at $45/hour. Last year, she worked 200 overtime hours.


  • Premium portion per hour = $45 - $30 = $15

  • Qualified overtime pay = $15 × 200 hours = $3,000

  • Maria files as Single, so she can deduct up to $12,500.

  • Her qualified overtime pay ($3,000) is below the limit, so she deducts $3,000 from taxable income.



How to Report the Deduction on Your Tax Return


The IRS requires clear reporting of qualified overtime pay and the deduction. Employers will provide information on your W-2 form showing total overtime pay and the premium portion.


When filing your tax return:


  • Use Schedule 1 (Form 1040) to claim the deduction as an adjustment to income.

  • Keep records of your overtime hours and pay rates in case of IRS questions.

  • Consult IRS instructions or a tax professional for detailed guidance.



What This Means for Workers


This deduction offers a meaningful tax break for workers who earn overtime pay. It reduces taxable income, which can lower your tax bracket or increase your refund. However, the deduction is temporary and limited, so planning your finances with this in mind is important.


If you regularly work overtime, tracking your hours and pay rates will help you maximize this benefit. Also, be aware of the phase-out thresholds to understand how your income affects your deduction.


 
 
 
bottom of page