A new deduction is allowed for tax years 2025 through 2028 of up to $12,500 ($25,000 for married filing jointly) for qualified overtime compensation. This additional deduction is allowed for taxpayers who itemize deductions or who take the standard deduction. For married taxpayers, the $25,000 limit can be allocated between spouses in any way.
“Qualified overtime compensation” is overtime compensation paid to an individual required under Section 7 of the Fair Labor Standards Act of 1938 (FLSA) that is in excess of the regular rate at which such individual is employed. For example, if an employee is paid at a standard rate of $12 per hour and an overtime rate of $18 per hour, the deduction is based on the $6 per hour excess paid for overtime.
To qualify, overtime pay must be reported on Form W-2 or Form 1099 to workers. There was insufficient time to adopt new procedures for Form W-2 reporting for 2025. Under a transition rule, payors (generally, employers) can report an approximate amount of overtime pay on these forms for the 2025 tax year.
Limitations
- The deduction is limited to $12,500 ($25,000 for married filing jointly)
- The $25,000 limit for married taxpayers filing a joint return applies to the couple overall.
- Married taxpayers must file jointly
- The deduction begins to phase out at AGI over $150,000 ($300,000 MFJ)
- The deduction is for income tax calculations. The entire amount of overtime is still subject to employee withholding taxes for Social Security and Medicare, and for self-employment taxes
- To qualify, workers must:
- Be classified as non-exempt employees under the Fair Labor Standards Act (FLSA)
- Work more than 40 hours per week at a rate not less than time an one-half their regular rate of pay
- Salaried employees may qualify, but there are additional limitations
- Most salaried employees are exempt from FLSA requirements and don’t qualify
- Must make less than $150,000 per year
- Must maintain proper documentation of hours worked and overtime earned
This is a “below the line deduction” meaning the deduction affects calculation of tax after limitations affected by AGI. It won’t help a taxpayer qualify for and/or increase the amount of other tax breaks with AGI-based eligibility requirements or phaseouts. This deduction, along with the new deductions for tax on tips, the additional senior deduction, and new car loan interest will be calculated on the new Schedule 1-A.