The “No Tax on Overtime” deduction lets eligible workers deduct the premium “half” of their FLSA overtime from federal taxable income for tax years 2025 through 2028 — capped at $12,500 (single) or $25,000 (joint), and phased out at higher incomes. It does not make overtime entirely tax-free, and it’s narrower than the headlines suggest. Here’s exactly how it works.
What’s actually deductible
Only the premium portion of time-and-a-half — the part of your overtime pay above your regular rate. If you earn $20/hour and $30/hour for overtime, the deductible amount is $10 per overtime hour, not the full $30.
IRS example: regular rate $20, overtime rate $30 → the $10/hour premium is the qualified, deductible amount.
Add those premium dollars across the year, then apply the cap and phaseout.
The caps and phaseout
| Filing status | Annual cap | Phaseout starts (MAGI) | Fully gone at |
|---|---|---|---|
| Single | $12,500 | $150,000 | $275,000 |
| Married filing jointly | $25,000 | $300,000 | $550,000 |
The cap drops by $100 for every $1,000 of modified AGI above the threshold. Example: a single filer with $200,000 MAGI is $50,000 over, so the cap falls by $5,000 — to $7,500.
What is still taxed
This is the part people miss:
- Social Security and Medicare (7.65% FICA) still apply to overtime.
- State income tax may still apply — the federal deduction doesn’t automatically carry to states.
- The regular-rate portion of overtime pay is still taxable; only the premium half is deductible.
So “No Tax on Overtime” really means “a federal income-tax deduction on the premium half of qualified overtime.” Useful, but not a blanket exemption.
What qualifies
- Only FLSA-required overtime (time-and-a-half over 40 hours/week).
- Overtime owed only under state law or a union contract above the FLSA does not qualify.
- Neither does state-mandated double time beyond the FLSA premium.
Two quick examples
Typical worker. $15,000 of qualified premium for the year, single, income under $150,000, 22% bracket → deduction capped at $12,500 → federal tax saved ≈ $2,750.
Higher earner. Same $15,000 premium, single, $200,000 MAGI → cap reduced to $7,500 → deduction $7,500 → at 24%, tax saved ≈ $1,800.
Estimate your own with the No Tax on Overtime calculator — it applies the cap and phaseout automatically.
Practical notes
- It’s a deduction, not a credit — it lowers taxable income, and your bracket decides the dollar savings.
- It’s available whether or not you itemize, and it doesn’t reduce your AGI.
- Your paycheck withholding may not change during the year; the benefit shows up when you file.
- For 2026, look for qualified overtime on W-2 Box 12, Code TT.
This is a temporary provision (2025–2028) unless Congress extends it. It is general information, not tax advice — confirm your situation with the IRS guidance or a tax professional.