No Tax on Overtime 2026: the $12,500 Deduction
The “no tax on overtime” rule is a deduction, not an exemption — and it covers only the overtime premium, not your overtime pay. Here is who qualifies, the 2026 caps, and how to claim it on Schedule 1-A.
Why your $10,000 of overtime is only a $3,333 deduction
This is the part almost everyone gets wrong. The deduction does not cover your overtime pay. It covers only the premium — the part that is extra because you worked overtime.
Say you earn $20 an hour and work 10 hours of overtime:
| Part of your overtime | How it is worked out | Amount | Deductible? |
|---|---|---|---|
| Regular rate | 10 hours × $20 | $200 | No — taxed normally |
| The extra half | 10 hours × $10 | $100 | Yes |
| Total overtime pay | 10 hours × $30 | $300 | — |
So $300 of overtime pay produces a $100 deduction. That is why the deductible amount is roughly one-third of your total overtime pay at time-and-a-half, and one-quarter of it at double time.
The 2026 caps and phase-outs
| Single / Head of household | Married filing jointly | |
|---|---|---|
| Maximum deduction | $12,500 | $25,000 |
| Phase-out starts (MAGI) | $150,000 | $300,000 |
| Deduction fully gone (MAGI) | $275,000 | $550,000 |
| Married filing separately | Cannot claim it at all | |
The deduction is "below the line" — you get it whether you take the standard deduction or itemise. That is unusual and it is the reason it is worth claiming even if you normally take the standard deduction.
Who actually qualifies
- You must be a non-exempt employee — overtime owed to you under the Fair Labor Standards Act (FLSA, section 7).
- Your overtime must be FLSA overtime. Overtime that exists only because of a state law (like California's daily overtime), a union contract, or your employer's own policy does not qualify.
- You need a valid Social Security number. An ITIN is not enough.
- If you are married, you must file jointly. Married filing separately = no deduction.
- Exempt salaried employees do not qualify.
What changed for the 2026 tax return
2025 was messy: employers were not required to report the overtime separately, so you had to dig through pay stubs and work out the premium yourself.
From the 2026 tax year, employers must report qualified overtime compensation separately:
- W-2 Box 12, code TT — employees
- 1099-MISC Box 14
- 1099-NEC Box 1d
If you had more than one job, add the amounts together. The cap applies to the total, not per job.
How to claim it, step by step
- Take the amount from W-2 Box 12, code TT (add every job).
- Enter it in Schedule 1-A (Form 1040), Part III — the qualified overtime section.
- Apply the cap: $12,500, or $25,000 if filing jointly.
- Work out your MAGI and apply the phase-out if you are over $150,000 ($300,000 joint).
- The result flows into the Schedule 1-A total, then to Form 1040, line 13b.
What this deduction is actually worth
A deduction reduces taxable income, so the saving depends on your bracket. If you are in the 12% bracket and deduct the full $12,500, that is roughly $1,500 off your tax bill. In the 22% bracket it is roughly $2,750.
Worth claiming — but nowhere near "overtime is now tax-free." The Social Security and Medicare still come out of every overtime dollar.
Things that trip people up
- It expires. Tax years 2025 through 2028 only. After that, Congress has to renew it or it disappears.
- Your W-4 can adjust withholding now. You do not have to wait until filing — you can reduce withholding during the year if you know you will claim the deduction.
- State tax is untouched. This is a federal deduction only. Your state may still tax overtime in full.
- Double time counts at the premium only. At 2×, the deductible premium is one-quarter of the total overtime pay, not one-third.
Related calculators
Work out your overtime pay first, then take one-third of it as your likely deductible amount.