How to Calculate the New Overtime Tax Deduction for Tax Year 2025 (One, Big, Beautiful Bill Act)

For the 2026 filing season (returns filed in 2026 for the 2025 tax year), the One, Big, Beautiful Bill Act introduces a brand-new federal tax deduction that lets many workers deduct a portion of their overtime income from taxable income — meaning some overtime pay won’t be taxed at all. (IRS)

This unprecedented deduction applies for tax years 2025 through 2028. (U of I Tax School)

What Is the “Overtime Tax Deduction”?

Under the OBBBA, individuals may claim a deduction for qualified overtime compensation — basically the extra pay they receive beyond their regular rate when working overtime. (IRS)

How It Works

• Qualified overtime compensation is generally the premium portion of overtime pay — for example, the extra half-time you receive on “time-and-a-half” wages. (IRS)
• Only the excess over your regular hourly rate is deductible. (IRS)
• You must claim this deduction on your federal income tax return when filing for tax year 2025. (IRS)

This is not a credit — it reduces your taxable income on your Form 1040. (IRS)

Maximum Deduction Limits (Important!)

For tax year 2025:

These amounts phase out once your modified adjusted gross income (MAGI) exceeds certain thresholds:

• $150,000 for single filers
• $300,000 for joint filers (IRS)

Step-by-Step: Calculating Your Overtime Deduction for 2025

1. Determine Your Qualified Overtime Pay

You need to identify just the overtime premium — not total overtime pay. Here’s how:

• If your employer separately reports your overtime premium: use that total. (IRS)
• If not, use IRS guidance methods (for example, dividing total overtime compensation by the factor implied by “time-and-a-half” pay to isolate the premium). (IRS)

These methods help when Forms W-2 and 1099 do not include separate boxes for overtime pay for the 2025 tax year. (IRS)

2. Apply the Deduction Limit

Once you know the qualified overtime total:

• Cap it at $12,500 (single) or $25,000 (joint). (IRS)
• If you exceed that amount, deduct only up to the cap.

3. Account for Income Phase-Outs

If your MAGI is above:

• $150,000 (single), or
• $300,000 (joint),

your deduction is reduced incrementally. (IRS)

The IRS guidance (Notice 2025-69) explains how to calculate the phase-out amount. (IRS)

Why Employers’ Information Reporting Matters (and the 2025 Transition)

For 2025 only, employers aren’t required to show qualified overtime separately on Form W-2 or Form 1099. (IRS)

That means:

• Taxpayers must track overtime hours and pay personally.
• Optionally, employers may provide supplementary info (such as in Box 14) to help employees prepare tax returns. (ADP)

Example Calculation

Scenario:

• A single worker earns $8,000 in overtime pay in 2025.
• Their overtime is at time-and-a-half.

Step 1: Determine qualified overtime premium.

• “Half-time” portion: $8,000 ÷ 3 ≈ $2,667 in qualified overtime. (IRS)

Step 2: Apply deduction limits.

• $2,667 < $12,500 cap → full amount deductible.

So this taxpayer would deduct $2,667 from taxable income on their 2025 return.

Key Takeaways

✅ This is a NEW deduction for qualified overtime, effective for tax years 2025–2028. (U of I Tax School)
✅ Workers can reduce taxable income by the overtime premium amount — up to $12,500 or $25,000. (IRS)
✅ The deduction phases out at higher incomes. (IRS)
✅ For 2025 only, taxpayers may need to piece together info themselves because Forms W-2/1099 won’t reflect it yet. (IRS)

Conclusion: A Game-Changer for Workers in 2025

The overtime deduction under the One, Big, Beautiful Bill Act represents a major shift in federal income tax policy, helping hourly workers keep more of their earnings by excluding part of their overtime pay from taxable income. (IRS)

Taxpayers should prepare by:

• Keeping detailed overtime pay records
• Understanding their MAGI and deduction limits
• Consulting updated IRS guidance (Notice 2025-69) when preparing returns