You've probably heard the buzz at the water cooler or seen the headlines scrolling by on your phone. There is a lot of talk about a "no tax on overtime" rule, and honestly, it sounds almost too good to be true for anyone who spends their Saturday mornings in the office or late nights at the warehouse. But let's be real—tax laws are rarely as simple as a three-word slogan.
The big question everyone is asking is: when does the no tax on overtime go into effect?
If you were looking for a specific date, here it is: the "No Tax on Overtime" provision officially went into effect on January 1, 2025. It was signed into law by President Trump on July 4, 2025, as part of the "One Big Beautiful Bill" (OBBBA), but the law was written to be retroactive. This means it covers all qualified overtime pay you earned starting from the very first day of 2025.
Since we are now in January 2026, you're actually about to see the results of this change for the first time on your upcoming tax return.
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The Reality of the Retroactive Start
It’s kinda weird how laws work sometimes. Even though the bill wasn't signed until mid-summer of 2025, the government decided to make it apply to the whole year. If you were sweating through extra shifts in February or March of last year, that money counts.
But don't expect a sudden "tax-free" paycheck right this second without any paperwork. Because the law passed mid-year, most employers didn't have their payroll systems updated in real-time to stop withholding taxes from your overtime hours in 2025.
What does that mean for you?
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Basically, you likely already paid those taxes through your regular withholding. To get that money back, you’ll need to claim the deduction on your 2025 federal tax return, which the IRS starts accepting on January 26, 2026.
How the No Tax on Overtime Rule Actually Works
Most people think this means the IRS just ignores your overtime pay entirely. That’s not quite it. It is actually structured as a "below-the-line" deduction.
Here is how the math shakes out. The law lets you deduct the "premium" portion of your overtime pay. If you make $20 an hour normally and $30 an hour for overtime (time-and-a-half), the $10 "extra" is what the law considers "qualified overtime compensation."
The Limits and Caps
You can't just work 100 hours a week and pay zero taxes. There are hard ceilings:
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- Individual Filers: You can deduct up to $12,500 in qualified overtime pay.
- Married Filing Jointly: The cap is $25,000.
- The Income Cutoff: If you’re a high earner, you might get left out. The benefit starts to phase out once your Modified Adjusted Gross Income (MAGI) hits $150,000 for singles or $300,000 for married couples. If you make more than $275,000 (single) or $550,000 (joint), the deduction disappears completely.
Does This Apply to My State Taxes Too?
This is where it gets messy. Just because the federal government says "no tax" doesn't mean your state agrees. States like Iowa, Montana, North Dakota, and Oregon have "rolling conformity," so they generally follow federal lead. If you live there, you're likely seeing state tax relief too.
On the flip side, states like California, New York, and Illinois have already signaled they aren't playing ball. They want their cut of your overtime, so you'll still see those state taxes disappear from your check.
And then there's Alabama. They were actually the pioneers here, starting their own overtime exemption back in 2024. However, their specific state-level exemption actually hit a "sunset" or expiration date on June 30, 2025, though the federal law now provides a new layer of relief for Alabamians.
What You Need to Do Right Now
Since the 2026 tax filing season is officially here, you need to look at your W-2 very closely.
The IRS has introduced a new code for Box 12. For your 2026 wages (the ones you're earning right now), your employer will use Code TT to report your qualified overtime. For the 2025 records you're about to file, the IRS allowed employers to use "any reasonable method" to estimate your overtime since the law was retroactive.
Actionable Steps for Tax Season:
- Check Box 12: Look for your overtime earnings specifically called out. If it's not there, ask your HR department for a "separate accounting" of your 2025 overtime. The IRS encouraged them to provide this.
- Use the New Form: You will need to fill out Schedule 1-A when you file your Form 1040 this year. This is where you actually claim the deduction.
- Don't Forget Payroll Taxes: Just a heads-up—this law only covers income tax. You still have to pay Social Security and Medicare taxes (FICA) on every cent of that overtime. The government isn't giving up those funds.
- Adjust Your W-4: If you plan on working a ton of overtime in 2026, talk to a pro about updating your W-4. You might be able to lower your withholding now so you get more money in your pocket every Friday instead of waiting for a refund next year.
The "no tax on overtime" era is officially here, but it's only scheduled to last through December 31, 2028. Unless Congress votes to extend it, the clock is ticking on this particular perk. Make sure you're keeping track of those extra hours now so you don't leave money on the table when you file this spring.