Overtime Deduction Explained- Tax update effective 2025-2028

If you work overtime, this could lower your 2025 tax bill (filed in 2026).

The IRS has clarified the new overtime tax deduction under IRC §225, allowing eligible workers to deduct qualified overtime compensation — with limits.

Highlights

• Up to $12,500 deduction (single)

• Up to $25,000 (married filing jointly)

• Phaseout begins at $150,000 MAGI (single) / $300,000 (joint)

Who Qualifies?

You must be a non-exempt employee under the FLSA. Exempt employees do not qualify. To qualify for the overtime tax deduction, you must be non-exempt under the Fair Labor Standards Act (FLSA)—the same rule that determines whether you’re legally entitled to overtime pay. You’re more likely to qualify if you’re paid hourly, receive overtime after 40 hours in a workweek, and your paycheck shows overtime at 1.5× or 2× your regular rate. You’re less likely to qualify if you’re salaried and classified as exempt or don’t receive overtime regardless of hours worked. The easiest way to confirm is to ask HR or employer: “Am I classified as a non-exempt employee under the FLSA?” If yes, you may qualify. 

Important for 2025

Employers are not required to separately report qualified overtime on Form W-2 for 2025. That means many taxpayers will need to calculate it themselves.

How It Works

Only the extra overtime premium is deductible — not the full overtime pay.

• Time-and-a-half → divide total overtime by 3

Example: $15,000 in overtime → $5,000 deductible.

To make your taxes simple, come to Wickenburg Tax & Accounting, LLC. We’re here to help you understand the rules, maximize deductions, and file with confidence.