If you work overtime, part of that extra pay can now come off your taxable income. Under the same law that created the tip deduction, workers can deduct qualified overtime pay on their 2026 federal return, up to $12,500 for a single filer or $25,000 for a married couple filing jointly. It is a real reduction in what you owe, and like the tip break, you can claim it whether or not you itemize. The catch is understanding which part of your overtime actually counts, because it is not the whole thing.
Only the premium half qualifies
This is the detail that decides your number. The deduction applies to the extra premium portion of overtime, not your entire overtime paycheck. When you work overtime that the federal Fair Labor Standards Act requires to be paid at time and a half, your employer pays your regular rate plus an extra half of that rate for those hours. It is that extra half that the deduction covers. According to the Treasury and IRS guidance, the deductible amount is the compensation that exceeds your regular rate of pay, the half in time and a half. So if your regular rate is $20 an hour and overtime pays $30, the deductible piece is the $10 premium per overtime hour, not the full $30.
Your employer reports the qualifying overtime amount to you, generally on your W-2, which is what you will use at filing time. That reporting is what keeps the deduction tied to actual FLSA overtime rather than any pay a worker might want to call overtime.
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The caps and the income phase-out
The maximum deduction is $12,500 for a single filer and $25,000 for a married couple filing a joint return. Those are ceilings on the deduction, so even a worker with a very heavy overtime year cannot deduct more than the cap. As with the tip deduction, the benefit phases out as income rises, beginning at $150,000 of modified adjusted gross income for a single filer and $300,000 for joint filers, and shrinking above those points. For most hourly and shift workers who rack up overtime, income sits comfortably below the phase-out, so the full premium is deductible up to the cap. The provision is scheduled to run through the 2028 tax year, giving it a multi-year life, though Congress could adjust it before then.
How it differs from the tip deduction
It is easy to lump the tip and overtime breaks together because they arrived in the same law and share the same phase-out thresholds, but they are separate deductions with separate caps, and a worker can qualify for both. A tipped employee who also works overtime could deduct qualified tips up to $25,000 and the qualifying overtime premium up to $12,500, subject to the income limits. They are not interchangeable, and claiming one does not use up the other. What they have in common is the mechanism: both lower your federal income tax while leaving Social Security and Medicare payroll taxes in place, so your overtime still counts toward your future benefits.
Claiming it on your return
When you file for 2026, you will figure the deduction on Schedule 1-A, the IRS form that gathers the new deductions in one place. If you use software or a preparer, confirm the overtime deduction is actually applied and that it is pulling the premium amount your employer reported, not your total overtime, since that is the most likely place for an error in the first filing seasons under the new rule. Keep your pay stubs and your W-2 so the reported figure is easy to check. On a $12,500 deduction, the tax saved depends on your bracket, but for a worker in the 22 percent bracket that is roughly $2,750 that stays in the household. For anyone who trades extra hours for extra pay, that is a meaningful reward for time already worked.
Which overtime counts, and which does not
Not every extra hour or bigger check qualifies, so it is worth knowing the boundary before you count on the deduction. The break applies to overtime required by the federal Fair Labor Standards Act, the time-and-a-half owed to covered, non-exempt workers for hours over 40 in a week. Overtime that comes only from a company policy or a union contract paying premium rates the federal law does not require may not qualify in the same way, and daily overtime rules that some states impose can differ from the federal weekly standard the deduction keys off. Pay that is not overtime at all, such as a shift differential, a bonus, or holiday pay, does not count toward it. Because the qualifying amount is the piece your employer identifies and reports, the cleanest approach is to rely on that reported figure rather than trying to reverse-engineer it yourself. The IRS has collected its guidance, FAQs, and worksheets on the new deductions at its resource hub for the law, which is the place to check if your overtime situation is unusual or your employer’s reporting is unclear.
This article was produced with AI assistance and reviewed by a human editor. Figures are linked to their primary sources; where a claim could not be verified from the public record, we say so.
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