Understanding the New Tax Deduction for Overtime Pay: What You Need to Know
- Charlot Gardy
- Nov 7
- 3 min read
Overtime work often means extra income, but until now, that extra pay has been fully taxable. The new tax deduction introduced by the One, Big, Beautiful Bill Act changes this by allowing working Americans and seniors to deduct a portion of their overtime pay from their taxable income. This change, effective from 2025 through 2028, offers significant tax relief for many taxpayers who earn overtime wages.
This post breaks down the key details of this new deduction, who qualifies, how to claim it, and what it means for your taxes.
What Is the New Overtime Pay Deduction?
The new tax deduction targets the extra pay workers receive for overtime hours. Specifically, it allows individuals to deduct the portion of their overtime compensation that exceeds their regular hourly rate. For example, if you earn "time-and-a-half" for overtime, the deduction applies to the "half" portion above your normal pay.
This deduction applies to qualified overtime compensation reported on official tax forms such as Form W-2 or Form 1099.
Who Can Claim the Deduction?
The deduction is available to both itemizing and non-itemizing taxpayers, making it accessible to a wide range of workers. However, there are some eligibility requirements:
You must include your Social Security Number on your tax return.
If married, you must file jointly to claim the deduction.
Your modified adjusted gross income (MAGI) must be below certain thresholds to claim the full deduction.
Income Limits and Phase-Outs
The deduction has income limits that reduce the benefit for higher earners:
For single filers, the deduction begins to phase out at a MAGI of $150,000.
For joint filers, the phase-out starts at $300,000.
The maximum annual deduction is $12,500 for individuals and $25,000 for joint filers. If your income exceeds the phase-out limits, the deduction amount decreases gradually until it phases out completely.
How Employers Report Overtime Pay
Employers and other payors must provide detailed information to both the IRS and employees. They will file information returns showing the total qualified overtime compensation paid during the year. Employees will receive statements reflecting this amount, which they will use to claim the deduction.
The IRS will offer transition relief in 2025 to help both taxpayers and employers adjust to these new reporting requirements.
Practical Examples of the Deduction
To understand how this deduction works, consider the following examples:
Example 1: Sarah earns $20 per hour and works 10 hours of overtime at $30 per hour (time-and-a-half). The extra $10 per hour for 10 hours equals $100. Sarah can deduct this $100 from her taxable income.
Example 2: John and his spouse file jointly. John earns $25 per hour and works 20 overtime hours at $37.50 per hour. The extra $12.50 per hour for 20 hours equals $250. John and his spouse can deduct this $250, up to the maximum allowed.
These deductions reduce taxable income, which can lower the overall tax bill.
How to Claim the Deduction on Your Tax Return
Claiming the deduction requires careful attention to tax forms:
Include the deduction on your tax return for the applicable years (2025-2028).
Ensure your Social Security Number is on the return.
Married couples must file jointly.
Use the statements provided by your employer or payor to report the qualified overtime compensation.
Tax software and tax professionals will likely update their systems to accommodate this new deduction, making the process smoother.
Impact on Seniors and Working Americans
This deduction benefits a broad group of taxpayers, including seniors who continue to work and earn overtime pay. It provides tax relief that can help stretch retirement income or supplement earnings.
For working Americans, especially those in industries with frequent overtime, this deduction offers a meaningful way to reduce tax liability and keep more of their hard-earned money.
What to Watch for in 2025 and Beyond
Since this deduction is new, taxpayers should:
Keep detailed records of overtime hours and pay.
Watch for statements from employers showing qualified overtime compensation.
Stay informed about IRS guidance and any updates to reporting requirements.
Consult tax professionals if unsure about eligibility or claiming the deduction.
The IRS’s transition relief in 2025 will ease the initial adjustment, but staying proactive will ensure you maximize this benefit.
This new tax deduction for overtime pay marks a significant change in how extra work is rewarded. By allowing workers to deduct the portion of overtime pay above their regular rate, the law offers a valuable tax break for millions of Americans.
If you regularly work overtime, prepare now to take advantage of this deduction starting in 2025. Review your pay statements, understand your income limits, and plan your tax filings accordingly to keep more of your overtime earnings.
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