Contributed by: PhillipB, FreeTaxUSA Agent, Tax Pro
The new tax law was signed on the 4th of July 2025. It includes a provision that allows people who are paid overtime to take a deduction of up to $12,500 of their overtime pay. The deduction is set to be available from 2025 until 2028. While the IRS still has guidance that needs to be released, here are the basic rules for being able to claim this deduction.
What portion of my income qualifies?
Income paid to hourly workers for time worked over the 40-hour work week is usually the hourly rate of the worker, plus an additional one-half of the worker’s hourly pay rate. A worker getting paid $20 an hour, would get paid $30 an hour for the overtime they work. The new law permits deducting the additional half of ‘time and a half’ pay. For this worker, that means deducting $10 from the $30 per hour rate.
The maximum amount that any taxpayer can deduct for overtime pay is $12,500.
For the worker mentioned above, that would be roughly 1250 hours of overtime work for the year, or 24 hours of overtime every week. The deduction is a per person deduction, and so the maximum deduction is $25,000 for married joint filers.
The overtime income deduction phases out when income reaches certain levels. For most taxpayers the phase out begins when modified adjusted gross income exceeds $150,000, and for married joint filers the phaseout starts at $300,000. The deduction is eliminated at a rate of $100 for every $1,000 the income exceeds the limitation. This means the deduction is fully eliminated for most taxpayers when income reaches $275,000, and for married joint filers, at income of $425,000.
What are the other requirements for this deduction?
Taxpayers are only eligible for this deduction if the following requirements are met:
- The taxpayer’s social security number is included on the tax return
- The taxpayer must file a joint return if they are married
How will overtime be reported by employers to the IRS?
Although new forms for 2025 have not been issued yet, the IRS will require employers to show the qualified overtime income of each employee on their Form W-2. For 2025, employers will have a safe harbor to estimate overtime income paid during the year.
Can I claim this deduction if I don’t itemize my deductions?
Yes. This deduction is available for all filers whether they itemize deductions.