Updated for tax year 2026
Overtime Tax Deduction 2026
The overtime tax deduction is a federal income tax deduction worth up to $12,500 a year for single filers and $25,000 for married couples filing jointly. It covers only the premium half of overtime required by the Fair Labor Standards Act, it shrinks as your income rises past fixed thresholds, and it applies to tax years 2025 through 2028. This page is about the deduction itself: how much it is worth, exactly what counts, who can claim it, and how it lands on your return.
What the deduction is
Congress created this deduction in section 70202 of the One Big Beautiful Bill Act, signed July 4, 2025. It added a new section 225 to the Internal Revenue Code. The deduction is claimed below-the-line on Schedule 1-A (Form 1040, Line 13b), and is available whether you take the standard deduction or itemize. It reduces taxable income, not AGI, so it does not affect credits or thresholds tied to AGI.
The deduction applies to tax years 2025 through 2028 and expires on December 31, 2028, unless Congress renews it. It covers federal income tax only. Social Security, Medicare, and state and local taxes still apply to every dollar of overtime pay.
For the broader law behind this deduction, including the political background and timeline, see our complete guide to no tax on overtime.
Deduction amounts and annual caps
| Filing status | Maximum deduction | MAGI phaseout starts | Deduction fully gone at |
|---|---|---|---|
| Single | $12,500 | $150,000 | $275,000 |
| Head of household | $12,500 | $150,000 | $275,000 |
| Married filing jointly | $25,000 | $300,000 | $550,000 |
Married filing separately does not qualify for the deduction at all. A married couple must file jointly to claim any of it. The caps are annual and apply per return, not per employer, so workers with two jobs combine their qualified premium from both before applying the cap.
In practice the caps are generous relative to what most workers earn. A worker at $25 an hour doing 10 overtime hours a week builds about $6,500 of qualified premium in a year, well under the $12,500 single cap. The cap only bites high earners with heavy overtime schedules or two-income joint filers.
How the MAGI phaseout works
The deduction phases out over a fixed income band. The reduction is $100 of deduction for each $1,000 of modified adjusted gross income above the threshold, counting only whole $1,000 increments. The formula uses the floor of excess MAGI divided by $1,000, so an excess of $1,999 counts as one increment, not two.
Worked examples. A single filer with $160,000 MAGI has $10,000 of excess, which is 10 full increments, so the deduction is reduced by 10 x $100 = $1,000. If that filer had $8,000 of qualified premium, the final deduction is $7,000. A single filer with $161,900 MAGI has $11,900 of excess, which floors to 11 increments, for a $1,100 reduction.
The band is 125 full increments wide on each side, because $12,500 divided by $100 equals 125, and 125 times $1,000 equals $125,000. That is why the deduction reaches zero at $275,000 single and $550,000 joint. If you sit near the edge of the band, timing matters. Because the test is MAGI, things like pre-tax 401(k) contributions and HSA deductions can pull you under a threshold and preserve part of the deduction.
Want your exact number? The overtime pay tax calculator runs your premium, cap, and phaseout together in one step.
What counts as qualified overtime compensation
Only overtime required by the Fair Labor Standards Act qualifies, and only the premium half of it. Under the FLSA, nonexempt employees must be paid at least 1.5 times their regular rate for hours over 40 in a workweek. The deductible part is the 0.5 times premium, not the whole payment.
The calculation is straightforward. Take your overtime hours for the year and multiply by half your regular hourly rate. If your regular rate is $24 an hour, each overtime hour contributes $12 of qualified premium. Four hundred overtime hours in a year equals $4,800 of qualified premium, before caps and phaseout.
That amount then goes through two filters in order. First the cap trims it to $12,500 or $25,000 depending on filing status. Then the MAGI phaseout trims what remains. Your final deduction multiplied by your marginal tax rate is your estimated tax savings. A $6,500 deduction at a 22 percent marginal rate is worth about $1,430.
Who can claim the deduction
Every one of these must be true:
- Nonexempt under the FLSA. You must be entitled to overtime under federal law.
- A valid Social Security number that authorizes work in the United States.
- Eligible filing status. Single, head of household, or married filing jointly. Married filing separately is excluded entirely.
- MAGI below the top of the phaseout band. Anything under $275,000 single or $550,000 joint still leaves some deduction on the table.
Three groups are out by definition. Exempt salaried workers in the executive, administrative, and professional categories do not qualify, because the FLSA does not require overtime for them. Most independent contractors and gig workers are not FLSA employees, so the deduction does not reach them — the rare exception is a worker treated as an independent contractor for tax purposes who is an employee under the FLSA, whose qualified overtime can be reported on Form 1099-NEC or 1099-MISC.
What does NOT count
The law is narrow on purpose. Amounts beyond what the FLSA requires are excluded:
- Overtime required only by state law, such as daily overtime rules that trigger below 40 hours a week
- Voluntary employer premiums paid above the FLSA minimum
- Premiums set by collective bargaining agreements that exceed FLSA requirements
- Shift differentials, weekend or holiday premiums, and standby or on-call pay
- Double time: where double time is paid, only the 0.5 times FLSA premium counts, not the extra full rate
How to claim it for 2026
Nothing changes in your paycheck during the year unless you submit an updated Form W-4 accounting for your expected overtime deduction. Employers otherwise keep withholding federal income tax on overtime as before. The benefit arrives when you file.
- For 2026, your employer must report your qualified overtime premium separately in W-2 Box 12, Code TT. For 2025 the IRS allowed transition relief, including reasonable methods like Box 14 reporting.
- Check the Code TT amount against your own pay records. If it looks wrong, ask your payroll department for a breakdown before you file.
- Apply the cap for your filing status, then the MAGI phaseout, to get your final deduction.
- Claim it on Schedule 1-A of your federal return. No itemizing needed.
Keep your pay stubs or year-end pay summary showing the premium separately. If the IRS questions the deduction, that paper trail is what proves your number.
Frequently asked questions
How much is the overtime tax deduction in 2026?
Up to $12,500 a year for single and head of household filers, and up to $25,000 for married couples filing jointly. Only the FLSA premium half of overtime counts, and the deduction shrinks once MAGI passes $150,000 single ($300,000 joint).
Can I claim the overtime deduction without itemizing?
Yes. It is a below-the-line deduction claimed on Schedule 1-A, so it works whether you take the standard deduction or itemize. It lowers your taxable income, not your AGI, so it does not change AGI-based credits or thresholds.
Does the full time-and-a-half rate count toward the deduction?
No. The deductible amount is only the premium half: the extra 50% above your regular hourly rate on FLSA-required overtime hours. If you earn $30 an hour on overtime, $20 is your base rate and only $10 per hour qualifies.
What if my income is over the phaseout threshold?
The deduction is reduced by $100 for each $1,000 of MAGI over $150,000 single ($300,000 joint), using the floor of your excess divided by $1,000. It reaches zero at $275,000 MAGI single ($550,000 joint). Partial deductions are common in between.
How do I claim the overtime deduction when I file?
Your 2026 W-2 reports qualified premium in Box 12, Code TT. Take that amount, confirm it matches your pay records, apply the cap and MAGI phaseout, and claim it on Schedule 1-A of your federal return. Withholding stays unchanged during the year unless you submit an updated Form W-4 accounting for your expected overtime deduction.
Official sources
- IRS Fact Sheet FS-2026-13 (August 6, 2026) — 2026 reporting guidance
- IRS Notice 2025-69 — 2025 transition relief
- OBBBA §70202 / new IRC §225 — the statute
Last updated: October 2026 · Overtime tax calculator · About us