You’ve probably heard the catchphrase "No Tax on Overtime" by now. It sounds like a dream for anyone grinding out 50-hour weeks. But honestly, the reality inside your 2026 tax return is a bit more complicated than a campaign slogan.
On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBB), also known as the Working Families Tax Cut. It officially turned that campaign promise into law. But here is the thing: it isn't a blanket "get out of taxes free" card for every extra hour you work. Basically, it's a specific deduction that has some pretty strict guardrails.
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If you’re expecting your entire overtime check to be tax-free, you might be in for a surprise.
How the Overtime Tax Deduction Actually Works
The biggest misconception is that the IRS just ignores your overtime pay. They don't. Instead, the law creates a "below-the-line" deduction. This means you still see taxes withheld from your paycheck like normal, but you get to claim that money back when you file your taxes.
For the 2025 tax year—the one you're likely filing right now in early 2026—there are some hard limits. You can deduct up to $12,500 of qualified overtime pay. If you’re married and filing jointly, that cap doubles to $25,000.
Wait, what exactly is "qualified" overtime? This is where it gets technical. The law specifically follows Section 7 of the Fair Labor Standards Act (FLSA).
The "Half" Rule
You know how overtime is usually "time-and-a-half"? The IRS only lets you deduct the "half" part.
- Example: You normally make $20 an hour.
- Your overtime rate is $30 an hour.
- Only the extra $10 per hour qualifies for the deduction.
- The base $20 is still taxed normally.
It gets even more specific. If you work in a state like California that requires overtime pay after 8 hours in a day (instead of just 40 hours in a week), that extra pay might not count unless it also meets the federal 40-hour threshold. If your boss just pays you extra because they're nice or because of a union contract, but it's not strictly required by the FLSA, you can't deduct it.
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Who is Eligible (and Who Isn't)
Not everyone with a job can claim this. You have to be a non-exempt W-2 employee. If you’re a "white-collar" salaried worker who doesn't get overtime pay under federal law, you’re out of luck.
There are also income limits. The "No Tax on Overtime" plan is geared toward middle-class earners. If your Modified Adjusted Gross Income (MAGI) is over $150,000 (or $300,000 for couples), the deduction starts to disappear. It phases out at a rate of $100 for every $1,000 you earn over those limits. If you're a high-flyer making $275,000 solo, your overtime deduction effectively hits zero.
Also, don't forget the "payroll tax" trap. This law only applies to federal income tax. You still have to pay:
- Social Security (6.2%)
- Medicare (1.45%)
- State and local income taxes (depending on where you live)
Your employer is still required to withhold these. So, your take-home pay on Friday might not actually look that much bigger. The "win" happens when you see your refund (or a smaller bill) in April.
The 2025 Transition Mess
Because the law was signed in the middle of 2025, the IRS had to scramble. For the 2025 tax year, employers weren't actually required to track "qualified overtime" on your W-2 in a specific way.
Most companies are using what the Treasury calls a "reasonable method" to estimate it. Some might put it in Box 14 of your W-2, while others might just give you a separate piece of paper. If your employer didn't track it well, you might have to dig through your old pay stubs and do the math yourself.
Starting with the 2026 tax year, things get more formal. The IRS has introduced Code TT for Box 12 on the W-2. This will be the official spot where your boss reports exactly how much "qualified overtime" you earned.
Why Economists are Divided
Kinda like everything in Washington, people are arguing about whether this is a good idea.
Supporters, like those at the American Enterprise Institute, argue that it rewards "effort" over "ability." Basically, it helps the person willing to work 60 hours a week to get ahead. They see it as a way to boost the economy by encouraging people to work more.
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On the flip side, groups like the Economic Policy Institute hate it. They argue it encourages "overwork" and could lead to health issues or burnout. There’s also the "fairness" argument—why should someone making $60,000 from a 40-hour job pay more in taxes than someone making $60,000 by working 50 hours? It's a valid question.
Then there is the cost. The Joint Committee on Taxation thinks this could cost the government about $90 billion through 2028. Since the law is set to expire on December 31, 2028, it’s basically a four-year experiment.
Actionable Steps for Tax Season
If you worked a lot of extra hours last year, don't just leave money on the table.
- Check your W-2 immediately. Look for Box 12 or Box 14. If you don't see a mention of "overtime" or "OBBB," ask your HR department for a "qualified overtime statement."
- Download Schedule 1-A. This is the new IRS form specifically for the "One Big Beautiful Bill" deductions. You'll need it to actually claim the money.
- Audit your pay stubs. If you earned "double-time" for holidays, remember that for 2025, you might only be able to deduct a fraction of that. The IRS has suggested using 1/4th of double-time pay as a "reasonable" estimate for the deductible portion.
- Watch your MAGI. If you're close to the $150k/$300k limit, look into contributing more to your 401(k) or traditional IRA. Lowering your MAGI can help you qualify for the full overtime deduction.
This policy is brand new and the IRS is still tweaking the rules. Keep your records organized. If the law isn't extended, 2028 will be the last year you can claim this, so make the most of it while it's here.