Honestly, the news cycle moves so fast these days that it's hard to tell what’s a campaign promise and what’s actually law. You've probably heard the buzz: is Trump getting rid of taxes on overtime? The short answer? Yes. But—and it's a big "but"—it’s not exactly a total "erasing" of every tax on every extra hour you work. On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law. This wasn't just another speech. It’s a real, functioning tax change that’s officially active right now for the 2025 and 2026 tax years.
The Meat of the Law
Basically, the government created a brand-new "above-the-line" deduction. This means you don't even have to itemize your taxes to get it. You just take it right off the top of your income. It specifically targets "qualified overtime compensation."
If you’re a worker who usually hits 50 or 60 hours a week to make ends meet, this is likely going to put money back in your pocket. But don't expect your Social Security or Medicare taxes to disappear. Those are still being taken out. This law specifically tackles federal income tax.
How the "No Tax on Overtime" Actually Works
There is a common misconception that if you earn $1,000 in overtime, you just don't pay any tax on that $1,000. That’s not quite how the IRS is handling it.
The law focuses on the "premium" portion of your pay. Think about it like this: if you make $20 an hour normally, your overtime rate is probably $30 (time-and-a-half). The first $20 of that is still your "regular rate." The extra $10—the "half" in time-and-a-half—is the part that qualifies for the deduction.
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- You can deduct up to $12,500 per year if you’re single.
- If you’re married and filing jointly, that cap jumps to $25,000.
- It only applies to overtime required by the Fair Labor Standards Act (FLSA).
What does that last part mean? Well, if your boss gives you "double time" because it’s a holiday, but the law only requires time-and-a-half, the IRS might only let you deduct that 0.5x premium. It’s a bit of a headache for payroll departments, but for you, it’s a nice chunk of change.
The Limits: Who Gets Left Out?
Not everyone is invited to the party. Sorta stinks if you're a high earner or a freelancer.
The deduction starts to phase out once your Modified Adjusted Gross Income (MAGI) hits $150,000 for single filers. If you’re married and filing jointly, the phase-out starts at $300,000. If you make way more than that, the benefit slowly shrinks until it hits zero.
Also, you’ve got to be a W-2 employee. If you’re a 1099 independent contractor or a "gig" worker, the rules are much muddier. As of early 2026, the IRS is still fine-tuning the regulations for contractors, but the bulk of the benefit is designed for hourly, non-exempt workers who are legally entitled to overtime pay.
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Is This Permanent?
Nope.
The "no tax on overtime" provision is currently set to expire on December 31, 2028. It’s a four-year window. The idea is to stimulate the economy and give working-class families a break, but like many tax laws, it has a "sunset" date. Unless Congress votes to extend it, we go back to the old way of taxing every cent of overtime in 2029.
What You Need to Do Now
If you’re working those extra hours, you need to be careful with your paperwork.
Check your W-2. Starting this year, your employer is supposed to separately report your qualified overtime. If they just lump it all into one "Wages" box, you’re going to have a hard time claiming the deduction.
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Keep your pay stubs. Honestly, with new laws like this, mistakes happen. If your W-2 looks wrong in January 2027, you’ll need those stubs to prove how much of your pay was actually that "premium" overtime.
Don't change your filing status. You cannot claim this deduction if you use the "Married Filing Separately" status. It’s a weird quirk in the law, but it’s there.
Practical Steps for Your Next Tax Return
Since we are in 2026, you're likely getting ready to file for the 2025 tax year. This is the first time anyone is actually using this deduction.
- Look for Schedule 1-A: This is the new form the IRS rolled out specifically for the overtime and tip deductions.
- Talk to your payroll admin: Ask them if they are using the "reasonable method" to track your overtime premium for the 2025 transition year.
- Adjust your withholding: If you know you're going to save $2,000 in taxes because of this, you might want to adjust your W-4 so you get that money in your paycheck now instead of waiting for a refund next year.
This policy is a massive shift in how the US views labor. It rewards the "grind," but it also adds a layer of complexity to your tax return that hasn't existed since the 1930s. Keep an eye on your MAGI; if you're close to that $150,000 mark, a few extra shifts could actually push you into the phase-out range, making the tax break less effective.
Actionable Insights:
- Verify W-2 Reporting: Ensure your employer is tracking "Qualified Overtime Compensation" in Box 14 or a designated area for your 2026 filing.
- Calculate Your Premium: Multiply your overtime hours by 0.5 times your base rate to estimate your specific deduction amount.
- Review MAGI: If your total income is nearing $150,000 (single) or $300,000 (joint), consult a tax professional to see how the phase-out impacts your specific refund.