As 2025 winds down, millions of hourly workers are buzzing about one of the hottest provisions from the One Big Beautiful Bill Act (OBBBA): the deduction for overtime pay. Often called “no tax on overtime,” this new rule lets eligible workers deduct up to $12,500 of qualified overtime income from their taxable earnings for tax years 2025 through 2028.
But here’s the catch—it’s temporary, phases out for higher earners, and won’t be around forever. Will you qualify in 2026, and could it save you thousands on your taxes filed in 2027? Let’s break it down, with real examples and planning tips to help you cash in before it’s gone.
What Exactly Is the Overtime Deduction?
Under OBBBA, signed in July 2025, workers can claim an above-the-line deduction (meaning it reduces your adjusted gross income even if you take the standard deduction) for qualified overtime pay:
• Cap: Up to $12,500 per year (2025–2028 only).
• Qualified overtime: Generally, pay at 1.5x your regular rate for hours over 40 per week, as reported on your W-2.
• Phaseout: Starts reducing for modified adjusted gross income (MAGI) over $150,000 (single) or $300,000 (joint)—fully gone at higher levels.
• Key detail: This applies to federal income taxes but not payroll taxes (Social Security/Medicare).
This is separate from the similar “no tax on tips” deduction (up to $25,000 cap) and the new senior bonus deduction.
Who Benefits Most—and Who Might Miss Out?
This break targets blue-collar and essential workers like nurses, factory employees, truck drivers, construction crews, and first responders who regularly log overtime.
Real-World Savings Examples (2026 Estimates): Assume a 22% marginal tax bracket.
• Nurse earning $10,000 in overtime: Full $10,000 deduction → ~$2,200 saved in federal income tax.
• Factory worker with $15,000 overtime: Deducts $12,500 max → ~$2,750 saved.
• Married couple, one spouse with $8,000 overtime, combined MAGI $140,000: Full deduction → ~$1,760–$2,640 saved (depending on bracket).
• High-earner (MAGI $180,000 single): Partial or zero phaseout → limited or no benefit.
If your overtime is sporadic or under $12,500, you’ll likely get the full ride. But self-employed? Sorry—this is for W-2 employees only.
Why Is This Thought-Provoking—and Controversial?
Proponents call it a win for hardworking Americans, putting more money in paychecks during tough economic times. Critics argue it’s a short-term gimmick that adds to the deficit without addressing root issues like wage stagnation.
Plus, it’s only through 2028—what happens in 2029? Will Congress extend it, or will overtime become fully taxable again? With the OBBBA making many 2017 cuts permanent, this feels like a targeted (but temporary) boost.
Big Question: Is “no tax on overtime” fair relief for essential workers, or does it unfairly exclude salaried employees and gig workers?
How to Maximize This in 2026
1. Track your hours now: Review pay stubs to ensure overtime is properly reported. Talk to HR about accurate W-2 coding.
2. Adjust withholding: Use the IRS withholding estimator to reduce take-home taxes upfront—get the money sooner!
3. Combine with other breaks: Pair it with higher 2026 retirement contributions ($24,500 for 401(k)s) or HSA limits to lower MAGI and stay under phaseouts.
4. Plan for 2029: If this expires, consider shifting to roles with built-in premium pay or negotiating base salary increases.
5. Year-end move for 2025: If you have extra hours left this year, log them—the deduction started in 2025!
This could be a game-changer for your wallet, especially if overtime is a big part of your income. But act fast—temporary rules like this don’t last.
What about you? Do you expect to claim overtime deductions in 2026? Share your job type (anonymously) and estimated overtime in the comments—I’ll reply with a rough savings estimate!
Disclaimer: This is general info based on current law. Rules can change; consult a tax pro for your situation.
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