If you’ve been clocking extra hours, 2025 brings a tax break worth celebrating. With the recent passage of the One Big Beautiful Bill Act (OBBBA) of 2025, eligible workers can now claim a brand-new deduction for overtime pay—directly reducing their federal tax bill. This change opens the door for millions of employees to keep more of their hard-earned extra hours in their own pockets.
Below, we’ll break down how the deduction works, who qualifies, and practical tax tips to help you capture the full value of this new benefit.
From 2025 through 2028, there is a new above-the-line tax deduction of up to $12,500 ($25,000 for joint filers) for qualified overtime compensation. Overtime is the half portion of being paid time-and-a-half as defined by the Fair Labor Standards Act. The benefit begins to phase out when your modified adjusted gross income exceeds $150,000 ($300,000 for joint filers). It phases out by $100 for every $1,000 you exceed the amount. So the phaseout ranges are:
Single: $150,000 – $275,000
Joint filer: $300,000 – $550,000
Example: Ima Working, a single taxpayer with $10,000 of overtime pay and MAGI of $170,000 can deduct $8,000 of her overtime pay. $10,000 overtime pay minus $2,000 or ($170,000 – $150,000)/1,000*$100).
This mid-year’s law change requires some historic research back to the beginning of the year. Get your payroll records and add up your historic overtime hours and pay. You will need this to ensure you are getting credit for all your overtime pay.
They are required to report these overtime hours on a W-2 or similar form. But the form does not yet have the overtime reporting mechanism. So what to do? Congress has established a reporting transition rule for 2025 and the IRS will come out with approved alternative reporting. This makes tracking your own overtime pay even more important, as this could be messy in 2025.
Congress is tasking the IRS and Treasury to put controls in place to ensure work is not reclassified as overtime. You’ll want to ensure your overtime work is properly paid and recorded given the additional tax benefit.
With this additional deduction, you may be over-withholding your federal tax. Now is a great time for a review.
Every state will need to determine whether they follow the new federal rules. Some will, some won’t, so stay alert.
Maximizing the new overtime deduction isn’t just about knowing the rules—it’s about keeping accurate records and planning ahead so every qualifying dollar works in your favor at tax time. Need assistance? Contact an Alloy Silverstein tax advisor.
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