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If you’ve been scrolling through news feeds lately wondering if your extra shifts just became a lot more profitable, you’re not alone. The short answer? Yes. It happened.
On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law. This massive piece of legislation—often called the "Working Families Tax Cut" in casual circles—turned a loud campaign promise into a real-life federal tax deduction. Basically, the goal was to stop the government from "punishing" people for working harder.
But here’s the thing: it’s not quite as simple as "zero taxes on every cent of overtime." There are caps, phase-outs, and a very specific definition of what counts as "overtime" in the eyes of the IRS. If you're expecting your entire time-and-a-half check to be tax-free, you might want to adjust those expectations just a little bit.
The Reality of No Tax on Overtime
Honestly, the name "No Tax on Overtime" is a bit of a marketing win. In reality, the law creates an above-the-line tax deduction for what the government calls "qualified overtime compensation."
What does that actually mean for your wallet? It means you can subtract a specific portion of your overtime pay from your taxable income when you file your returns. Since it’s "above-the-line," you don't even have to itemize your deductions to get the benefit. You can take the standard deduction and still claim this.
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The law is retroactive to January 1, 2025. This means as we sit here in 2026, you are likely looking at your first chance to claim this on the taxes you're filing right now. But keep in mind, this isn't a permanent fixture of the tax code. As of now, the provision is set to expire on December 31, 2028, unless Congress decides to extend it.
The $12,500 Cap and Other Rules
You can't just work 100 hours a week and expect it all to be tax-free. The IRS has put a ceiling on the "Big Beautiful Bill."
- Single Filers: You can deduct up to $12,500 in qualified overtime pay.
- Married Filing Jointly: The limit jumps to $25,000.
- The Phase-Out: If you're a high earner, the benefit starts to vanish. If your Modified Adjusted Gross Income (MAGI) hits $150,000 (or $300,000 for couples), the deduction starts shrinking until it hits zero.
What Exactly Counts as "Qualified Overtime"?
This is where people get tripped up. The law specifically points to Section 7 of the Fair Labor Standards Act (FLSA). Basically, if you are a non-exempt employee who gets paid time-and-a-half for working more than 40 hours in a week, you're in the club.
However, the deduction only applies to the "premium" part of your pay. Let's say you make $20 an hour normally. Your overtime rate is $30. Under the new law, only the extra $10 (the "half" in time-and-a-half) is deductible. The base $20 is still taxed like normal income.
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What's Excluded?
- State and Local Taxes: Trump can change federal law, but he can't tell your state governor what to do. You’ll likely still owe state income tax on that overtime unless your state specifically moved to match the federal change.
- Payroll Taxes: This is a big one. You still have to pay Social Security and Medicare (FICA) taxes on every dollar. The deduction only applies to your federal income tax.
- Contractual Overtime: If your union contract says you get overtime for working on a Sunday—even if you haven't hit 40 hours that week—that usually won't qualify for the federal deduction. It has to be FLSA-mandated overtime.
How to Claim the Deduction in 2026
Since the law passed mid-year in 2025, the reporting was a bit of a mess last year. Employers were told to use "any reasonable method" to track it. But for the 2026 tax season, things are getting more formal.
The IRS has introduced Box 12, Code TT on the W-2 form. Your employer should be using this code to report exactly how much "qualified overtime" you earned. When you use software like TurboTax or H&R Block, or if you’re still doing it by hand on a Schedule 1 (Form 1040), that’s the number you’ll need.
If your boss didn't track it separately in 2025, don't panic. There are transition rules that allow for approximations, but you'll want to keep your pay stubs just in case. Honestly, the burden is mostly on the payroll departments to get this right, but it never hurts to double-check their math.
Is This Helping the Economy?
There’s a lot of debate here. Proponents, including the Trump administration and labor groups like the NAHB, argue that this puts money directly into the pockets of the people who work the hardest. It encourages people to pick up that extra shift at the warehouse or the hospital.
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On the flip side, some economists worry about the "reclassification" risk. They fear companies might try to lower base pay and push more money into "overtime" to give employees a tax break without actually paying them more. The Treasury Department has already issued a warning that they’ll be watching for this kind of "tax gaming."
Your Next Steps for Tax Season
If you're ready to see how this affects your refund, start by gathering your documents.
Check your 2025 W-2s as they arrive this month. Look specifically for Box 12 and see if there is an amount listed next to Code TT. If it's blank and you know you worked 50-hour weeks all year, it might be time for a quick, polite chat with your HR department. They might need to issue a corrected W-2C.
Also, if you're a "Married Filing Separately" household, keep in mind you are ineligible for this deduction. You might want to run the numbers with a tax pro to see if switching to "Jointly" makes more sense this year given the new $25,000 deduction cap.
The "No Tax on Overtime" policy is finally live, and while it's more of a "Less Tax on Overtime" situation for most, it’s still one of the biggest shifts in how blue-collar pay is treated in decades.