Disclaimer: Do not make tax planning or preparation decisions based on just this article. This article is for informational purposes only. The tax code and any guidance the IRS provides should be relied on for tax preparation and planning, as well as a competent tax professional who you have engaged for services. The tax code can and will change and as of July 10, 2025 the IRS has not yet published guidance or procedures for this deduction. This article does not cover all the details of this topic.

Note: At this time we understand that overtime compensation -what qualifies for this deduction- is the premium. This means the portion of overtime pay that is in excess of your “normal” pay. We expect that the IRS will clarify this.

A new deduction for overtime compensation was recently passed into law. This is temporary, starting for tax year 2025 and going through tax year 2028. This deduction is independent of the standard deduction and itemizing, so doing either of those does not impact the ability to take the overtime compensation deduction.

Regardless of filing status, individuals may deduct up to $12,500 of qualifying overtime compensation (up to $25,000 when filing married filing jointly). 

The individual’s W-2 must show the amount of qualified overtime compensation. The IRS will provide guidance on pre-2026 reporting. 

This deduction does have a phase out. The overtime deduction allowable is reduced by $100 for every $1000 over a modified adjusted gross income (MAGI) of $150,000 (or $300,000 when filing married filing jointly). It does not go down below zero. 

A social security number (SSN) is required to get this deduction. 

This deduction is a below-the-line deduction and does NOT change Adjusted Gross Income. It does lower taxable income. 

The IRS will be issuing guidance for taking this deduction, so there could be some important requirements that come up that we are not aware of at this time.