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How will the "No Tax on Overtime" deduction work from 2026 through 2028?

Contributed by: MatthewD, FreeTaxUSA Agent, Tax Pro

Overtime binder and weekly time sheet, representing the No Tax on Overtime deduction

The "No Tax on Overtime" federal deduction applies to tax years 2025 through 2028. It retroactively took effect on January 1, 2025, and is currently set to expire after December 31, 2028, unless Congress passes new legislation to extend it.

History of the OT deduction

On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was passed into law and gave workers who are paid overtime (OT) a deduction of up to $12,500. The deduction is based on the Fair Labor Standards Act (FLSA) and applies to the qualified overtime pay that exceeds regular pay. This deduction has been a great benefit for workers who have earned overtime. For many it could mean a larger refund or less federal tax owed. See these FreeTaxUSA Community articles for more details:

How to claim the new OBBBA overtime deduction

Do I qualify for the new overtime pay deduction?

Changes going forward

Tax year 2025 was a little confusing because the IRS, employers, and payroll companies were in a rush to adjust for the coming tax season. Total overtime was reported in box 14 of Form W-2 or on year-end payroll statements. Because the deduction is only part of the total overtime pay earned, most people had to calculate the deductible amount before entering it.

The good news is that beginning with 2026 the deduction will be calculated by employers and reported on Form W-2 in Box 12 with code TT. Claiming the deduction is as simple as entering your Form W-2, the amount, and code for overtime from box 12.

Entering the deduction

In FreeTaxUSA, enter your W-2 by following the menu path: Income > Common Income > Wages (W-2). Select +Add a W-2.

After you enter your W-2 with box 12, code TT, and the overtime deduction amount, you’re taken to the Overtime or Tips screen.

screenshot of the Overtime or Tips from Employer. Overtime Deduction. Box 12 of your W-2 shows the Deductible part of your overtime pay totals $4,500. Do you need to adjust this amount? No is checked)

On this screen, confirm the amount is correct. You're reminded the deduction is different from the total overtime you were paid. If the amount is correct, leave the default answer as No for, "Do you need to adjust this amount?" and continue your return.

However, if the overtime deduction amount from your W-2 is incorrect, answer, Yes to, "Do you need to adjust this amount?".

screenshot of the Overtime or Tips from Employer page. There are new deductions for overtime and tips. Overtime Deduction. Box 12 of your W-2 shows the Deductible part of your overtime pay totals $4,500. Do you need to adjust this amount? Yes is checked and the Deductible Overtime Compensation box is filled. FAQ links to the questions, "How do I know how much deductible overtime I had?" and "What if I was paid double (2x) overtime?

You'll be shown the Deductible Overtime Compensation box to enter the correct deduction. Also, helpful FAQs are provided to assist you with the calculations. After a correction is entered, continue your return.

Summary

Beginning in 2026, employers will calculate the deductible overtime amount and report it on Form W-2, Box 12, using code TT. In FreeTaxUSA, enter your W-2 information, then review the Overtime or Tips screen. If the amount is correct, all you need to do is continue your return. If it’s incorrect, you can adjust it. Several FAQs are available to help you calculate the correct amount.