Beginning with tax year 2025 and continuing through 2028, eligible workers may claim new deductions for qualified tips and qualified overtime compensation. The deductions are available whether you itemize or take the standard deduction.

No Tax on Overtime: what is actually deductible?

For qualified overtime, the deduction generally applies only to the overtime premium - not the entire overtime paycheck. The overtime must be compensation required under Section 7 of the Fair Labor Standards Act (FLSA). Overtime that is paid only because of a union contract, employer policy, state rule, or other arrangement may not qualify if it is not required under the federal FLSA.

Example: A worker earns $20 per hour and receives time-and-a-half, or $30, for 10 overtime hours. Total overtime pay is $300. The regular-pay portion is $200; the extra “half-time” premium is $100. Generally, the $100 premium - not the full $300 - is the amount that may qualify for the deduction.

Annual limit: Up to $12,500 of qualified overtime compensation, or up to $25,000 on a married joint return.

Income phaseout: The deduction begins to phase out when modified adjusted gross income (MAGI) exceeds $150,000 for most filers or $300,000 for married couples filing jointly.

Does overtime become completely tax-free?

No. Qualified overtime compensation is still generally treated as wages and remains subject to Social Security and Medicare taxes. Federal income-tax withholding may also still occur during the year; the deduction reduces.

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