No tax on overtime
"No tax on overtime" is a deduction, not an exemption. Your overtime is still taxed through the year; some of it comes back when you file.
What is actually deductible
Only the premium: the half above your regular rate in time and a half. On a $26.00 rate, each overtime hour pays $39.00, and $13.00 of that is the premium. Eight overtime hours a week for 46 weeks is 368 hours and $4,784 of qualified overtime, not the $14,352 the hours were worth in total.
It has to be overtime the Fair Labor Standards Act required. Overtime paid under a contract or union agreement when the FLSA did not require it does not qualify, and nor does anything paid to an FLSA-exempt employee, however their employer labels it.
| Regular rate | Overtime rate | Qualified overtime | Deduction | Tax saved |
|---|---|---|---|---|
| $16.00 | $24.00 | $2,944 | $2,944 | $648 |
| $20.00 | $30.00 | $3,680 | $3,680 | $810 |
| $24.00 | $36.00 | $4,416 | $4,416 | $972 |
| $28.00 | $42.00 | $5,152 | $5,152 | $1,133 |
| $32.00 | $48.00 | $5,888 | $5,888 | $1,257 |
| $38.00 | $57.00 | $6,992 | $6,992 | $1,389 |
The cap and the phase-out
The deduction stops at $12,500, or $25,000 on a joint return. Neither figure is indexed, so they are the same in 2026 as in 2025 and will be the same in 2028.
Above $150,000 of modified AGI, or $300,000 filing jointly, it shrinks by $100 for every full $1,000 you are over. Full thousands only: $1,500 over the line costs you $100, not $150.
| MAGI, single | Reduction | Deduction left | MAGI, joint | Deduction left |
|---|---|---|---|---|
| $150,000 | $0 | $12,500 | $300,000 | $25,000 |
| $160,000 | $1,000 | $11,500 | $310,000 | $24,000 |
| $180,000 | $3,000 | $9,500 | $330,000 | $22,000 |
| $200,000 | $5,000 | $7,500 | $350,000 | $20,000 |
| $240,000 | $9,000 | $3,500 | $390,000 | $16,000 |
| $275,000 | $12,500 | $0 | $425,000 | $12,500 |
What it does not do
It does not cut Social Security or Medicare. Overtime stays fully subject to FICA. On $4,784 of qualified overtime that is about $366 still withheld regardless.
It does not reduce your AGI. This is the detail nearly every summary gets wrong. It is allowed under section 63(b), which cuts taxable income after AGI is already fixed. So it cannot pull you back under the phase-out threshold, and anything else keyed to AGI is unaffected.
It does not change your weekly paycheck by itself. Your employer may not reduce withholding for it unless you file a fresh Form W-4.
Common questions
- Is overtime really tax free now?
- No. It is taxed as normal through the year and a capped deduction gives part of the income tax back when you file. Social Security and Medicare are untouched, and only the premium half qualifies.
- How much can I deduct?
- Up to $12,500, or $25,000 on a joint return, and only as much qualified overtime as you actually earned. Above $150,000 of modified AGI, or $300,000 jointly, the amount falls by $100 per full $1,000 of excess.
- Do I need to itemize to claim it?
- No. It is available whether you itemize or take the standard deduction. It is worked out on Schedule 1-A and carried to line 13b of Form 1040.
- Does it apply if I am self-employed?
- No. The deduction is tied to overtime required under section 7 of the FLSA, which applies to employees. Self-employment has no FLSA overtime. The tips deduction is different and self-employed people can claim that one.