No Tax on Overtime: Complete Guide to the New 2025 Deduction (Save Up to $4,625)

No Tax on Overtime: Complete Guide to the New 2025 Deduction

On July 4, 2025, Congress passed the One Big Beautiful Bill Act (OBBBA), which included a groundbreaking provision: No Tax on Overtime. This new tax deduction allows millions of American workers to deduct up to $12,500 (or $25,000 for joint filers) of their overtime pay from federal income taxes.

If you work overtime, this could save you $1,000 to $4,600+ on your federal tax bill. Here's everything you need to know.

Quick Summary:

• ✅ Deduct up to $12,500 (single) or $25,000 (joint) of overtime pay
• ✅ Available for tax years 2025-2028
• ✅ Phases out starting at $150,000 MAGI (single) or $300,000 (joint)
• ✅ Can be combined with standard deduction
• ❌ Doesn't reduce payroll taxes
• ❌ State taxes may still apply

What is No Tax on Overtime?

No Tax on Overtime is a federal income tax deduction for qualified overtime compensation earned by non-exempt workers. It was created to provide tax relief for middle-class workers who put in extra hours to support their families.

The Problem It Solves

Before this law, 100% of overtime pay was fully taxable at your regular income tax rate. For workers in the 22% tax bracket earning $10,000 in overtime, that meant paying $2,200 in federal income tax on those extra hours.

Now: Those same workers can deduct the first $12,500 of overtime, paying $0 federal income tax on it and saving $2,200+ annually.

Legislative History

Timeline:

• January 2025: Proposed in budget reconciliation package
• March 2025: House passes bill (246-184)
• June 2025: Senate passes amended version (52-48)
• July 4, 2025: President signs into law
• Effective: Retroactive to January 1, 2025

Political background: Passed on party-line vote as part of larger tax reform package. Currently set to expire after 2028 unless extended.

How Much Can You Save?

The tax savings depend on your overtime pay and tax bracket:

Maximum Tax Savings by Tax Bracket

Most workers are in the 22% or 24% bracket, so realistic savings are $1,500-$6,000 annually.

Real-World Worker Examples

Healthcare Worker (Nurse):

• Base: $70,000
• Overtime: $18,000
• Filing: Single
• Tax bracket: 22%
• Savings: $2,750 (can deduct full $12,500)

Manufacturing Worker:

• Base: $55,000
• Overtime: $8,500
• Filing: Married Jointly
• Tax bracket: 12%
• Savings: $1,020 (deducts $8,500, limited by actual OT)

Police Officer:

• Base: $85,000
• Overtime: $22,000
• Filing: Married Jointly
• Tax bracket: 22%
• Savings: $5,500 (can deduct full $25,000)

Retail Manager:

• Base: $45,000
• Overtime: $6,000
• Filing: Head of Household
• Tax bracket: 12%
• Savings: $720 (deducts $6,000)

Who Qualifies for No Tax on Overtime?

✅ Eligibility Requirements

You must meet ALL of the following:

1. Non-Exempt Employee Status

You must be classified as non-exempt under the Fair Labor Standards Act (FLSA). This typically means:

• Hourly workers (most qualify)
• Some salaried workers earning under $684/week ($35,568/year)
• Not classified as executive, administrative, or professional

Common qualifying occupations:

• Nurses and healthcare workers
• Manufacturing and factory workers
• Retail and food service workers
• Construction workers
• Truck drivers and delivery drivers
• Security guards and police officers
• Warehouse workers
• Customer service representatives

2. Earn Qualified Overtime Compensation

You must earn overtime pay that meets FLSA standards:

• Time-and-a-half pay (1.5× your regular rate)
• For hours exceeding 40 in a workweek
• Properly documented by your employer

3. Income Under Phase-Out Limits

Your Modified Adjusted Gross Income (MAGI) must be below:

• Single: Under $275,000
• Married Jointly: Under $550,000
• Head of Household: Under $275,000

4. Proper Filing Status

You must file as:

• Single
• Married Filing Jointly
• Head of Household

Married Filing Separately is NOT eligible.

❌ Who Doesn't Qualify

Exempt Employees:

• Salaried managers earning $35,568+/year
• Doctors, lawyers, teachers (professional exemption)
• Outside salespeople
• Computer professionals earning $27.63+/hour

Self-Employed/Contract Workers:

• Independent contractors
• 1099 workers
• Gig economy workers
• Freelancers

High Earners:

• Single filers with MAGI ≥ $275,000
• Joint filers with MAGI ≥ $550,000

Married Filing Separately:

• This filing status is specifically excluded from the deduction

What Counts as Qualified Overtime Compensation (QOC)?

✅ Qualified Overtime Includes:

Time-and-a-half pay for hours over 40/week:

• Regular overtime shifts
• Mandatory overtime
• Voluntary overtime
• Weekend/holiday overtime (if it's time-and-a-half)

Example calculation:

• Regular rate: $25/hour
• Overtime rate: $37.50/hour
• Overtime hours: 500 hours/year
• QOC: $18,750

Your employer calculates and reports this on your W-2.

❌ Does NOT Count as QOC:

Non-overtime premium pay:

• Shift differentials
• On-call pay
• Standby pay
• Weekend premium (if not true OT)

Bonuses and other compensation:

• Performance bonuses
• Holiday bonuses
• Commissions
• Stock options

Double-time or higher:

• Only the time-and-a-half portion counts
• If you earned double-time, only 1.5× counts toward QOC

Tips earned during overtime:

• These can qualify for the separate "No Tax on Tips" deduction
• Cannot be claimed for both deductions

Understanding the Phase-Out Rules

The deduction doesn't disappear immediately when you exceed the income threshold—it phases out gradually.

Phase-Out Thresholds

Phase-Out Calculation

The formula: Deduction reduced by $100 for every $1,000 above the threshold.

Step-by-step example (Single filer):

1. Determine excess income:
   • MAGI: $175,000
   • Threshold: $150,000
   • Excess: $25,000
2. Calculate reduction:
   • $25,000 ÷ $1,000 = 25 thousands
   • 25 × $100 = $2,500 reduction
3. Available deduction:
   • Maximum: $12,500
   • Reduction: $2,500
   • Available: $10,000
4. Actual deduction:
   • Lesser of: Overtime earned ($15,000) or Available ($10,000)
   • Deduction: $10,000
5. Tax savings:
   • $10,000 × 32% bracket = $3,200 saved

Phase-Out Impact Table

Single filers with $15,000 overtime:

Modified Adjusted Gross Income (MAGI)

What is MAGI?

For most people, MAGI equals your Adjusted Gross Income (AGI) from line 11 of Form 1040.

MAGI = AGI + certain deductions added back:

• Foreign earned income exclusion
• Foreign housing exclusion
• Student loan interest deduction
• Tuition and fees deduction
• IRA deduction

For 99% of workers, MAGI = AGI. Just use your AGI from line 11.

How to Claim the No Tax on Overtime Deduction

Step 1: Get Your QOC from Your Employer

Your employer is required to calculate your Qualified Overtime Compensation and report it on your W-2.

Where to find it:

Tax Year 2025:

• W-2 Box 14 ("Other")
• May be labeled "QOC" or "Overtime Comp"

Tax Year 2026 and beyond:

• W-2 Box 12 with code "TT"
• Standardized reporting

If it's not on your W-2:

1. Contact your employer's payroll department
2. Request QOC calculation
3. Get documentation showing:
   • Total overtime hours
   • Overtime rate
   • Total overtime compensation

Step 2: Complete Schedule 1A

Schedule 1A: Additional Deductions and Adjustments (new form for 2025)

Part I - Modified AGI:

• Line 1: Enter your AGI from Form 1040 line 11
• Lines 2-5: Add back certain exclusions (most people skip)
• Line 6: Your MAGI (usually same as AGI)

Part III - No Tax on Overtime:

• Line 18: Enter your QOC from W-2
• Line 19: Enter maximum deduction ($12,500 or $25,000)
• Line 20: Enter phase-out threshold ($150,000 or $300,000)
• Line 21: Calculate your allowed deduction (form has worksheet)
• Follow instructions for phase-out calculation

Step 3: Complete Form 1040

Line 13b: Enter total from Schedule 1A line 38

This reduces your taxable income, lowering your tax owed.

Step 4: Submit Your Return

Attach Schedule 1A to Form 1040 and submit:

• E-file (fastest, recommended)
• Mail (include payment if owed)

Using Tax Software

Supported by all major providers:

• TurboTax: Updates as of February 2026
• H&R Block: Fully supported
• TaxAct: Prompts for QOC
• FreeTaxUSA: Free federal filing includes Schedule 1A

What to do:

1. Enter your W-2 information
2. Software will detect QOC in box 14 or 12
3. Answer questions about filing status and MAGI
4. Software calculates deduction automatically

Filing an Amended Return

If you already filed 2025 taxes without claiming:

1. Wait for original return to process
2. File Form 1040-X (Amended U.S. Individual Income Tax Return)
3. Attach Schedule 1A with No Tax on Overtime calculation
4. Expect refund in 16-20 weeks

Worth it? Yes, if your refund will be over $500. For smaller amounts, consider whether the paperwork is worth your time.

Important Limitations and Considerations

1. Payroll Taxes Still Apply

This deduction does NOT affect payroll taxes:

You still owe 7.65% on ALL overtime:

• 6.2% Social Security tax (up to wage base)
• 1.45% Medicare tax
• 0.9% Additional Medicare (if over $200K/$250K)

Example:

• Overtime: $10,000
• Payroll taxes: $765 (still owed)
• Income tax: 22% × $10,000 = $2,200 (NOW $0 with deduction)
• Net savings: $2,200 (income tax only)

Your employer also pays 7.65% employer portion (doesn't change).

2. State Income Taxes

Federal deduction only. State treatment varies:

States that automatically conform to federal deductions:

• Most states eventually adopt federal changes
• Check your state Department of Revenue website

States with no income tax (no impact):

• Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming

States that may not conform:

• California (often doesn't adopt new federal deductions)
• New York (selective conformity)
• Check state-specific guidance

Estimate state impact:

• If your state doesn't conform, you'll still owe state tax
• Typical state rates: 3-7%
• Reduces overall benefit by 10-30%

3. Below-the-Line Deduction

What does "below-the-line" mean?

This deduction is taken after calculating AGI but before calculating taxable income.

Impact:

• ✅ Reduces taxable income (lowers tax)
• ✅ Can be taken WITH standard deduction
• ❌ Does NOT reduce AGI
• ❌ Won't help you qualify for AGI-based benefits

AGI-dependent benefits NOT affected:

• Roth IRA contribution limits
• Student loan interest deduction
• Education credits
• Premium tax credits (healthcare)

Example:

• Your AGI: $85,000 (too high for student loan interest deduction)
• No Tax on Overtime deduction: $10,000
• AGI still $85,000 (doesn't drop to $75,000)
• Still can't claim student loan interest

4. Temporary Provision (Expires 2028)

Currently only for tax years 2025-2028.

What happens after 2028?

• Scenario 1: Congress extends it (likely if popular)
• Scenario 2: It expires, overtime fully taxable again
• Scenario 3: Modified version passes (different limits)

Planning tip: Don't count on this deduction for long-term financial planning beyond 2028.

Tax Planning Strategies

Strategy 1: Maximize Overtime in Qualifying Years

If you have control over your schedule, concentrate overtime in 2025-2028 when the deduction is available.

Example:

• 2024 (no deduction): Worked 4 hours OT/week = $8,000
• 2025-2027 (deduction): Work 8 hours OT/week = $16,000/year
• 2028 (deduction): Return to 4 hours OT/week

Benefit: Maximize tax-free overtime while deduction exists.

Strategy 2: Optimize MAGI for Maximum Deduction

If you're near the phase-out threshold, reduce MAGI:

Ways to lower MAGI:

1. 401(k) contributions (reduces AGI directly)
   • Max contribution: $23,500 (2026)
   • Every $1,000 contributed = $100 more overtime deduction
2. Traditional IRA contributions
   • Up to $7,000 ($8,000 if 50+)
   • Reduces AGI if you qualify
3. HSA contributions
   • $4,300 (self) or $8,550 (family) for 2026
   • Triple tax advantage + reduces AGI
4. Time capital gains carefully
   • Realize losses in high-income years
   • Defer gains if possible

Example optimization (Single filer):

• Current MAGI: $152,000
• Increase 401(k) by $3,000
• New MAGI: $149,000 (under threshold)
• Save $300 on overtime deduction phase-out
• Plus: $660 tax savings on $3,000 401(k) contribution (22%)
• Total benefit: $960

Strategy 3: Timing of Overtime Work

Front-load overtime early in the year to ensure you hit maximum deduction:

Why?

• Life happens (injury, job change, family needs)
• Guarantee you maximize the benefit
• Better cash flow earlier in year

Example:

• Goal: $12,500 OT for full deduction
• Option A: Spread evenly = $1,042/month × 12
• Option B: Heavy first 8 months = $1,563/month × 8
• Option B is safer (hit goal by August)

Strategy 4: Couples Strategy (Married Filing Jointly)

If both spouses earn overtime:

Option 1: Both work overtime

• Spouse A: $15,000 OT
• Spouse B: $12,000 OT
• Combined: $27,000
• Deduct: $25,000 (hit maximum)

Option 2: Optimize based on phase-out

• If MAGI near $300K, reduce other income
• Focus OT with lower-earning spouse
• Better phase-out position

Strategy 5: Document Everything

Keep records for 3 years after filing:

• Pay stubs showing overtime hours
• W-2 with QOC
• Employer's calculation methodology
• Time tracking records
• Schedule 1A and Form 1040

Why? IRS may audit new deductions more frequently in early years.

No Tax on Overtime vs. No Tax on Tips

The same law included No Tax on Tips, a parallel deduction for tipped workers.

Side-by-Side Comparison

Can You Claim Both?

No, but with an exception:

• You cannot double-dip the same income
• You can claim overtime deduction on OT pay AND tips deduction on tip income (if eligible for both)

Example: Restaurant server who works overtime:

• Regular tips: $18,000 → Claim No Tax on Tips
• Overtime pay: $4,000 → Claim No Tax on Overtime
• Total deduction: $22,000

Which is Better?

For workers with both overtime and tips:

Strategy: Claim tips deduction first (higher limit), then add OT deduction up to combined limits.

Industry-Specific Impact

Healthcare Workers

Huge beneficiaries:

• Nurses routinely work 10-20 OT hours/week
• Typical OT: $15,000-$30,000/year
• Average savings: $3,300 (22% bracket)

Example: ICU Nurse

• Base: $75,000
• Overtime: $22,000
• Deduction: $12,500
• Tax savings: $2,750

Manufacturing and Factory Workers

Solid benefits:

• Mandatory overtime common
• Typical OT: $8,000-$15,000/year
• Average savings: $1,760 (22% bracket)

Example: Auto Plant Worker

• Base: $60,000
• Overtime: $12,000
• Deduction: $12,000
• Tax savings: $2,640 (22% bracket)

Retail and Food Service

More modest benefits:

• Part-time workers may not hit threshold
• Typical OT: $3,000-$8,000/year
• Average savings: $500-$1,000 (12% bracket)

Example: Store Manager

• Base: $42,000
• Overtime: $5,500
• Deduction: $5,500
• Tax savings: $660 (12% bracket)

Construction Workers

Seasonal but substantial:

• Heavy OT in busy season
• Typical OT: $10,000-$20,000/year
• Average savings: $2,200 (22% bracket)

Example: Electrician

• Base: $68,000
• Overtime: $16,000
• Deduction: $12,500
• Tax savings: $2,750

Police, Fire, and Emergency Services

Among biggest beneficiaries:

• Mandatory overtime for coverage
• Typical OT: $20,000-$40,000/year
• Average savings: $3,000-$5,500

Example: Police Officer

• Base: $82,000
• Overtime: $28,000
• Deduction: $12,500 (single) or $25,000 (married)
• Tax savings: $2,750-$5,500

Common Mistakes to Avoid

Mistake 1: Confusing Gross Overtime with QOC

Wrong: "I earned $20,000 in overtime hours" Right: "I earned $20,000, of which $13,333 is QOC (time-and-a-half portion)"

Your employer calculates this—don't guess.

Mistake 2: Claiming Shift Differentials

Not QOC:

• Night shift premium
• Weekend premium (if not OT)
• On-call pay
• Hazard pay

Only time-and-a-half for hours over 40/week qualifies.

Mistake 3: Forgetting About Phase-Out

Mistake: "I earn overtime so I get the full $12,500 deduction" Reality: Check your MAGI—phase-out may reduce it

Always run the calculation if your MAGI is over $100,000.

Mistake 4: Not Verifying W-2

Check your W-2 carefully:

• Is QOC reported in box 14 or 12?
• Does it match your pay stubs?
• Contact employer immediately if missing

Don't assume it's correct—verify before filing.

Mistake 5: Missing the Filing Requirement

You must:

• Complete Schedule 1A
• Attach it to Form 1040
• Enter deduction on correct line

It's not automatic—you must claim it.

Mistake 6: Claiming as Married Filing Separately

This filing status is NOT eligible. Must file jointly to claim.

Frequently Asked Questions

Is the No Tax on Overtime deduction refundable?

No, it's a deduction, not a credit. It reduces your taxable income, which reduces your tax owed. If your tax owed is already $0, you won't get additional refund from this deduction.

Can self-employed people claim this?

No. You must be a W-2 or 1099-NEC employee receiving qualified overtime compensation from an employer. Self-employed overtime-equivalent income doesn't qualify.

What if I have multiple jobs with overtime?

All qualified overtime from all W-2 employers counts toward your deduction, up to the maximum ($12,500 or $25,000).

Do I have to itemize to claim this deduction?

No! This is an "above-standard-deduction" deduction. You can take it in addition to the standard deduction. Most people will take both.

What happens if my employer doesn't report my QOC?

Contact them immediately. If they refuse, you'll need to calculate it yourself and attach documentation. Consider consulting a tax professional.

Can I claim this retroactively for 2024?

No. The law is effective starting January 1, 2025. Years 2024 and earlier don't qualify.

Will this affect my eligibility for other deductions or credits?

It won't affect AGI-based benefits (since it doesn't reduce AGI). It might slightly affect some income-tested credits by reducing taxable income.

What if I'm phased out completely?

If your MAGI exceeds $275,000 (single) or $550,000 (joint), you can't claim any deduction. However, if you're close, consider MAGI reduction strategies.

Is overtime still subject to higher withholding?

Yes. Your employer will still withhold taxes at supplemental wage rates (typically 22%) on overtime pay. You'll get refund when you file return and claim deduction.

What if Congress doesn't extend this past 2028?

Then overtime will be fully taxable again starting in 2029. Enjoy it while it lasts and plan accordingly.

Calculate Your Overtime Tax Savings

Ready to see exactly how much you'll save with the No Tax on Overtime deduction? Use our free calculator:

Enter your filing status, income, and overtime pay to see:

• Your exact deduction amount
• How much you'll save on federal taxes
• Impact of phase-out (if applicable)
• Comparison scenarios

The Bottom Line

The No Tax on Overtime deduction is a significant tax benefit for millions of American workers. If you qualify:

✅ Claim it: Don't leave money on the table ✅ Plan ahead: Optimize MAGI and timing if possible ✅ Document everything: Keep records for audit protection ✅ Use tax software or professional: Ensure accurate filing ✅ Act now: Deduction expires after 2028 (unless extended)

For a nurse earning $75,000 + $18,000 OT:

• Tax savings: $2,750/year
• Over 4 years (2025-2028): $11,000

That's real money that can go toward:

• Emergency fund
• Retirement savings
• Paying off debt
• Family needs

Don't miss out on this valuable deduction. Calculate your savings and plan to claim it on your next tax return.

Last Updated: January 9, 2026 | Source: OBBBA (One Big Beautiful Bill Act), July 2025 | IRS Publication: Pending

Disclaimer: This guide is for educational purposes. Tax laws are complex and individual situations vary. Consult a qualified tax professional for personalized advice.