How to Claim the New Temporary Overtime Deduction on Your 2025 Tax Return (Filed in 2026)
For millions of hourly workers, overtime pay is essential to keeping up with rising living costs. But overtime also comes with a frustrating downside: higher taxes. Starting in the 2025 tax year (filed in early 2026), a new temporary deduction is giving hourly employees meaningful relief.
This new benefit—often referred to as the “No Tax on Overtime” deduction—allows qualifying workers to deduct up to $12,500 of overtime pay from their taxable income. For many families, this will result in noticeably larger refunds or significantly lower tax bills.
This guide explains how the deduction works, what counts as qualified overtime compensation, and the exact steps to claim this tax break on your 2025 return.
What Is the New Overtime Deduction?
Beginning with the 2025 tax year, eligible workers may deduct:
- Up to $12,500 of overtime wages
- In addition to the standard deduction
- Regardless of whether they itemize deductions
This is designed as a temporary relief measure to help hourly workers who logged substantial overtime during the year.
Key Benefits of the Overtime Deduction
- Reduces taxable income
- Lowers your end-of-year tax bill
- Increases your refund if you already had withholding taken out
- Simple, straightforward deduction—no complicated paperwork required
This deduction applies only to overtime pay, not your regular hourly wages.
What Counts as “Qualified Overtime Compensation”?
Not all extra pay automatically qualifies. The IRS defines qualified overtime compensation as:
1. Overtime paid at time-and-a-half
For example, if your regular rate is $18 per hour, overtime paid at $27 per hour qualifies.
2. Overtime paid at double time
Some industries (healthcare, manufacturing, transportation) offer double-time pay. This also qualifies.
3. Verified overtime paid through employer payroll
The pay must appear on:
- Your paystubs
- Your W-2’s Box 1 and Box 12 breakdowns
- Employer wage records
What does NOT qualify?
- Holiday bonuses
- Shift differentials
- Hazard pay
- Tips
- Per diem or reimbursement
- Contractor or gig income (1099 workers)
Only W-2 employees who receive traditional overtime under federal or state labor rules can claim the deduction.
Income Limits and Phase-Out Rules
This deduction is income-capped to ensure it primarily benefits lower- and middle-income workers. Key rules:
- Full deduction available under the lower AGI threshold
- Partial deduction available within the phase-out range
- Deduction eliminated once AGI exceeds the upper limit
Most hourly workers—including those in retail, manufacturing, healthcare, hospitality, warehouse, and service roles—will qualify for the full deduction.
How Much Can This Save You?
Your tax savings depend on how much overtime you earned and your tax bracket.
Estimated Savings If You Deduct the Full $12,500
| Tax Bracket | Potential Savings |
|---|---|
| 10% | $1,250 |
| 12% | $1,500 |
| 22% | $2,750 |
| 24% | $3,000 |
Even workers who earn only part of the allowance (for example, $3,000 or $6,000 of overtime) will see meaningful savings on their tax bill.
Step-by-Step Guide: How to Claim the Overtime Deduction on Your 2025 Return
Claiming the deduction is simple, but accuracy is critical. Here is the exact process:
Step 1: Gather Proof of Your Overtime
Keep the following:
- Paystubs showing overtime hours
- Employer-issued annual wage summary
- Year-end pay statement
- Your Form W-2
This proof must clearly distinguish overtime from regular wages.
Step 2: Calculate Total Overtime Interest Paid in 2025
Add up all overtime compensation paid in 2025. Your employer’s payroll system or year-end summary will show this clearly.
If you earned more than $12,500 in overtime interest, the maximum deduction is capped at $12,500.
Step 3: Use the IRS Worksheet for the Overtime Deduction
The IRS will release an updated worksheet for the 2025 tax year, which will:
- Confirm your eligibility
- Apply income phase-out rules
- Determine your deductible amount
Tax software will automatically compute this for you if your W-2 indicates overtime.
Step 4: Enter the Deduction on Your Form 1040
Your deduction will be listed as a separate line-item adjustment on your 2025 return (2026 filing season).
Because it is an “above-the-line” style deduction:
- You do NOT need to itemize
- You can still take the full standard deduction
- Your refund increases automatically when taxable income decreases
Step 5: File Electronically for Faster Processing
Electronic filing helps the IRS verify:
- Your W-2
- Employer-submitted wage data
- Overtime breakdowns
Paper returns take much longer, especially if the IRS flags your withholding or overtime numbers for review.
Who Benefits Most From the Overtime Deduction?
The deduction is especially valuable for:
- Healthcare workers
- Manufacturing employees
- Warehouse staff and forklift operators
- Retail employees
- Restaurant and hospitality workers
- Transportation and logistics workers
- Public safety employees
- Tradespeople working extended shifts
- Any hourly worker logging significant overtime
Workers with fluctuating schedules or seasonal overtime will see the largest refund increase.
Recordkeeping Tips to Avoid Refund Delays
To ensure a smooth refund process:
- Keep every paystub from 2025
- Review Box 1 and Box 12 on your W-2
- Make sure employer payroll records match your own
- Save digital copies of all documents for three years
- Avoid filing before you receive your final W-2
Mismatched or missing overtime data is one of the top causes of IRS refund delays.
The No Tax on Overtime deduction is a game-changing temporary benefit for millions of hourly workers. By allowing up to $12,500 of overtime wages to be deducted from taxable income, workers can significantly lower their tax bill or increase their refund during the 2026 filing season.
To claim it:
- Keep accurate records
- Verify your overtime totals
- Use the IRS worksheet
- File electronically with direct deposit
This deduction rewards the workers who put in the longest hours during 2025—and understanding how to claim it ensures you receive every dollar you’re entitled to.
