‘No tax overtime’ Deduction: Eligibility, How to Claim
The One Big Beautiful Bill Act added a new tax break that is expected to increase last year’s average refund of nearly $3,200 by anywhere from $300 to $1,000. When President Donald Trump signed the OBBBA in July, many of its provisions were reworked to take effect in the 2025 tax year.
One of OBBBA’s signature provisions aims to allow certain hourly workers to keep more of the wages earned from their hardest work weeks. Although the White House described this provision as “no tax on overtime,” experts say the reality is quite different.
“It’s not as easy as it sounds,” said Craig Wild, a partner at accounting firm Wild, Maney & Resnick.
That’s because “deductions are subject to strict eligibility and reporting requirements,” as Wild told Imali via email. He adds that common mistakes include not understanding what qualifies as overtime and failing to account for end-of-income categories.
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Here are the key facts Wild and other experts say taxpayers need to know before they claim the “overtime tax” deduction on their 2025 tax return.
Who qualifies for ‘overtime tax exemption’?
Not all American workers qualify for this new deduction — even among people who work more than 40 hours a week. To be eligible to claim “no overtime tax,” you must be a non-exempt hourly employee covered by the Fair Labor Standards Act (FLSA) who works more than 40 hours per week.
Broadly, this means that you earn an hourly wage rather than a set wage, and you do not have a “managerial, administrative or professional” role, according to the Department of Labor, which has a comprehensive guide on its website that explains the FLSA’s provisions.
There are limits on both the amount of income you can earn to qualify and the dollar amount you can deduct.
On the income side, the ability to take the deduction begins for people with incomes above $150,000 ($300,000 for couples) and ends completely with incomes above $275,000 ($550,000 for couples). The dollar amount you can claim for the deduction is $12,500 ($25,000 for married couples).
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What benefits qualify for ‘overtime tax exemption’?
Once you’ve decided you’re an eligible employee, you need to calculate how much overtime you worked and how much overtime pay you received in 2025, which experts warn could be a problem for taxpayers.
Beginning in 2026, employers are required to report overtime on employees’ W-2 tax forms. But this year, workers are on their own to collect their wages and cover hours, said Janet Holtzblatt, senior director at the Urban-Brookings Tax Policy Center.
“It is up to the tax payer whether he is ready for a deduction and how much he can claim,” he said.
Holtzblatt notes that even though the IRS has published new 1040 filing instructions that include specific guidelines for “overtime” deductions, people still find the calculations challenging.
“Although they have tried to make it easier for taxpayers with these formulas, they are not accurate at all,” he warns.
What you need to know about ‘overtime tax exemption’
After factoring in your overtime pay, there’s another caveat that many taxpayers don’t understand, Holtzblatt says — and it could land you in hot water with the IRS if you slip up.
Even if “no overtime tax” is how the deduction is charged to Americans, “it’s not the full amount,” he notes.
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To be clear: You only get to take the overtime premium deduction. In other words, if you earn $20 per hour regularly and $30 per hour of overtime worked, you can only claim $10 per hour of $30.
People who deduct their full hourly rate and a half rather than just the premium risk claiming more deductions than they owe. In addition, if you are one of the lucky few who earns double for overtime hours worked, you can still only deduct a premium of 50% of your regular hourly rate rather than a full 100% salary payment. (Using the above assumption, if you earn $20 per hour regularly and $40 per hour overtime, you can still claim $10 of each $40.)
Finally, this deduction applies only to the income tax portion of your holdings. You still owe Social Security and Medicare taxes for overtime pay.
“It becomes very difficult to determine how much your overtime pay is,” Holtzblatt said.
More from Mali:
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