What Is the Income Phase-Out for No Tax on Overtime? (w/Examples) + FAQs

This article reflects federal rules as of June 2026 and covers tax year 2025 (the 2026 filing season). State rules are summarized in general terms below. Tax law changes — confirm current figures before you file.

Quick Answer

The phase-out starts when your modified adjusted gross income (MAGI) tops $150,000 (single) or $300,000 (joint) for tax year 2025. Above that, the deduction drops by $100 for every $1,000 of extra MAGI. It is fully gone near $275,000 single and $550,000 joint.

The “No Tax on Overtime” deduction lets eligible workers write off up to $12,500 of overtime pay ($25,000 on a joint return), but high earners lose part or all of it as income climbs. If your MAGI sits even one dollar over the threshold, your deduction shrinks — and a worker at $170,000 single already loses $2,000 of the break before counting anything else.

This matters now because the deduction is temporary, it runs only for tax years 2025 through 2028, and 2025 is the first year you can claim it. According to the Tax Foundation analysis of OBBBA, the overtime provision is projected to reduce federal revenue by tens of billions over its life, which signals how many workers it touches. Knowing your exact phase-out point can be the difference between a full break and zero.

💵 How the $150,000 / $300,000 MAGI thresholds shrink your deduction, step by step.
🧮 Worked dollar examples showing the exact deduction at several income levels.
🚫 Who is locked out, including married-filing-separately taxpayers and many salaried workers.
🏛️ Whether your state taxes overtime even when the federal government does not.
📝 The form to file, the records to keep, and the deadline you cannot miss.

This article is educational and is not a substitute for advice from a licensed tax professional for your specific situation.

What “No Tax on Overtime” Actually Means

The name is a slogan, not the law. The real rule, created by the One Big Beautiful Bill Act (OBBBA, signed July 4, 2025), is an income tax deduction for “qualified overtime compensation.” Your overtime is not magically tax-free. Instead, you subtract a capped amount of it from your taxable income.

Here is the part that surprises people. Only the premium part of overtime counts — the extra “half” in time-and-a-half. Per the IRS overtime Q&A (FS-2026-01), if you earn $30 an hour and get $45 for an overtime hour, only the $15 premium is “qualified overtime compensation.” The first $30 is regular pay and is never deductible.

The deduction is also “above the line.” That means you can claim it whether you take the standard deduction or itemize. It lowers your adjusted gross income for this purpose and reduces income tax, but the IRS guidance is clear that it does not cut Social Security or Medicare (FICA) taxes. Your overtime still gets the 7.65% payroll bite.

The consequence of misreading the slogan is real. A worker who expects every overtime dollar to escape tax, and adjusts their W-4 to under-withhold, can owe a surprise bill plus an underpayment penalty in April. A common misconception is that the whole “time-and-a-half” check is deductible; it is not — only the half-premium is. What you should do: treat this as a deduction worth a few hundred to a couple thousand dollars in real tax savings, not a full exemption.

The Caps Come First, Then the Phase-Out

Two separate limits stack on top of each other, and people confuse them constantly. Understanding the order is the key to the whole topic.

Limit One: The Dollar Cap

The first limit is a hard ceiling. The IRS confirms the deduction is capped at $12,500 of qualified overtime per return for single filers and $25,000 for a joint return, for tax year 2025. Even if you earn $40,000 in overtime premiums, a single filer can deduct only $12,500.

This cap is per return, not per person. On a joint return where both spouses work overtime, the couple shares the $25,000 ceiling. The consequence: a two-earner couple with heavy overtime can hit the cap fast and lose the value of premiums above it. What to do: track your premium-only overtime so you know whether you are even near the cap.

Limit Two: The MAGI Phase-Out

The second limit is income-based and is the focus of this article. Once your MAGI passes $150,000 (single) or $300,000 (joint) for 2025, the cap itself starts shrinking. The phase-out reduces the deduction by $100 for every $1,000 of MAGI above the threshold.

So the phase-out does not reduce your overtime — it reduces your maximum allowed deduction. The consequence of ignoring it: a high earner who claims the full $12,500 when their cap is really $9,000 has overstated a deduction, which can trigger IRS adjustment, back tax, and interest. What to do: run the phase-out math (below) before you enter a number on your return.

How the Phase-Out Math Works

The formula is simple once you see it. Take your MAGI, subtract the threshold, divide by $1,000, multiply by $100, and subtract that from your starting cap.

The reduction is the same dollar amount for single and joint filers — $100 per $1,000 over — but the starting points and starting caps differ. A single filer starts from a $12,500 cap at $150,000 MAGI. A joint filer starts from a $25,000 cap at $300,000 MAGI.

Because a single filer’s cap is smaller and the reduction rate is identical, single filers reach $0 faster relative to the joint $25,000 cap. The table below shows the key markers for tax year 2025.

Filing status and MAGI marker	Maximum overtime deduction
Single, MAGI at or below $150,000	$12,500 (full, if you earned that much premium)
Single, MAGI $170,000	$10,500
Single, MAGI $200,000	$7,500
Single, MAGI $275,000	$0 (fully phased out)
Joint, MAGI at or below $300,000	$25,000 (full, if earned)
Joint, MAGI $360,000	$19,000
Joint, MAGI $425,000	$12,500
Joint, MAGI $550,000	$0 (fully phased out)

One nuance most articles skip: your actual deduction is the lower of (a) the phased-out cap and (b) the premium overtime you really earned. If your phased cap is $10,500 but you only earned $4,000 in premiums, you deduct $4,000. The cap is a ceiling, not a guarantee.

Which Situation Applies to You?

The right answer depends on three things: your income, your filing status, and whether your overtime even qualifies. Use this quick branch to find your path.

MAGI well below the threshold and you have FLSA overtime — You likely get the full cap, limited only by how much premium you earned. Read the worked examples below.
MAGI in the phase-out band ($150K–$275K single, $300K–$550K joint) — Run the formula above; your cap is reduced. The partial-phase-out example is for you.
MAGI above the top of the band — Your deduction is $0. Skip to “Mistakes to Avoid” so you do not over-claim.
You are married filing separately — You are generally excluded entirely; see the exclusions section.
You are salaried/exempt or paid “overtime” only by a contract or state law — Your pay may not be FLSA overtime and may not qualify; read “What Counts” carefully.

Worked Examples With Real Dollars

Numbers make this concrete. Each example uses tax year 2025 rules and assumes the worker earned enough premium overtime to reach the cap unless noted.

Example 1 — Maria, ICU Nurse, Single, MAGI $140,000

Maria’s MAGI is below $150,000, so no phase-out applies. Her cap stays at $12,500. She earned $14,000 in premium overtime, so she is limited by the cap, not her income. Maria deducts $12,500. At a 24% marginal rate, that saves her about $3,000 in federal income tax for 2025.

Example 2 — Darnell, Electrician, Single, MAGI $170,000

Darnell is $20,000 over the $150,000 threshold. Dividing $20,000 by $1,000 gives 20, and 20 times $100 is a $2,000 reduction. His cap falls from $12,500 to $10,500. He earned $11,000 in premiums, so he is limited by the phased cap and deducts $10,500. At 32%, that is roughly $3,360 in tax savings.

Example 3 — The Riveras, Married Joint, MAGI $360,000

Both spouses work overtime. They are $60,000 over the $300,000 joint threshold. That is 60 units of $1,000, times $100, for a $6,000 reduction. Their cap drops from $25,000 to $19,000. They earned $22,000 in combined premiums, so they deduct $19,000. At a 32% rate, that saves about $6,080.

Example 4 — Sofia, Warehouse Lead, Single, MAGI $280,000

Sofia is past the single phase-out endpoint. At $280,000, her reduction is $130 units… actually 130 times $100 equals $13,000, which exceeds her $12,500 cap. Her deduction is $0, no matter how much overtime she worked. The lesson: above roughly $275,000 single, the break disappears completely.

What Counts as Qualified Overtime

This is where many workers wrongly assume they qualify. The deduction applies only to overtime required by section 7 of the Fair Labor Standards Act (FLSA) — generally hours over 40 in a workweek for non-exempt employees.

Several common forms of “overtime” do not count, per the IRS guidance:

Overtime paid only because of a union contract or company policy, not the FLSA.
Daily overtime or “over 8 hours a day” pay required by state law but not federal law.
The extra above the FLSA minimum — if your employer pays double-time, only the FLSA-required half-premium qualifies.
Pay to salaried exempt employees, who are not FLSA overtime-eligible at all.

The consequence of claiming non-qualifying overtime is an overstated deduction the IRS can reverse, with tax and interest due. A frequent misconception: “all the extra I get for working late counts.” It does not — only the federally required premium does. What to do: check your status. Federal employees can confirm on Standard Form 50, block 35, where “N” means non-exempt and eligible.

Who Is Excluded Entirely

Some workers get $0 no matter their income. Knowing this upfront saves a wasted claim and a possible penalty.

Married filing separately — The IRS rules require married taxpayers to file jointly to claim the deduction. File separately and you lose it.
No valid Social Security number — The worker who earned the overtime must have an SSN valid for employment, listed on the return.
Exempt/salaried employees — Not FLSA overtime-eligible, so their extra hours never qualify.
Independent contractors — Generally not covered, since FLSA overtime applies to employees, not the self-employed.
Those above the top of the phase-out band — A single filer over ~$275,000 or joint over ~$550,000 MAGI gets nothing for 2025.

Federal vs. State: Does Your State Tax Overtime?

This is the angle most workers miss. The OBBBA deduction is a federal break. Your state may or may not follow it, because states do not automatically conform to new federal deductions.

States that have no income tax — such as Texas, Florida, and Washington — do not tax your overtime either way, so federal conformity is moot for residents there. States with an income tax fall into two camps: those that start from federal AGI and may pick up the deduction automatically, and those that “decouple” and require you to add the deduction back on the state return.

Federal treatment	State possibilities
Deduction lowers federal taxable income for 2025	State may follow if it uses federal AGI as its base
Deduction is above-the-line	State may decouple and tax the overtime anyway

The consequence of assuming your state follows along: you under-pay state tax and owe a balance plus interest. Because conformity is still being decided in many statehouses for 2025, check your own state’s department of revenue page before you file. A handful of states, including Alabama, also passed their own separate overtime exemptions, so the rules genuinely vary.

Effective Year, Expiration, and Why Timing Matters

The deduction is temporary. It applies to tax years 2025 through 2028 and, under current law, sunsets after December 31, 2028. Unless Congress extends it, overtime worked in 2029 gets no deduction.

Tax year 2025 is the first eligible year, claimed on the return you file in early 2026. For 2025 only, employers were not required to separately report qualified overtime on your W-2, so you may have to calculate the premium yourself using Notice 2025-69 and the Schedule 1-A instructions. Starting in 2026, employers must report it separately, which makes future filing easier.

The consequence of waiting: if you miss claiming it on a 2025 return, you generally have three years to amend with Form 1040-X — but you must keep the records to back it up. What to do now: save your pay stubs showing overtime hours and rates for every year through 2028.

How to Claim It: The Form and Steps

For tax year 2025, the deduction is reported on Schedule 1-A, filed with your Form 1040. The amount flows into the calculation that reduces your taxable income.

The basic steps:

Confirm you are FLSA overtime-eligible and not excluded.
Add up your premium-only qualified overtime for 2025 (the half in time-and-a-half).
Calculate your MAGI and run the phase-out formula to find your cap.
Enter the lower of your premium overtime or your phased cap on Schedule 1-A.
Keep pay stubs and any employer statement as proof.

The standard filing deadline is April 15, 2026 for tax year 2025; an extension moves the filing date to October 15, 2026 but not the payment date. Doing this yourself is free with most software; a tax preparer typically charges from about $200 to $500 depending on complexity. If your overtime calculation is messy or your income is near the phase-out edge, that fee can pay for itself.

Mistakes to Avoid

Deducting all of your overtime pay — Only the FLSA half-premium qualifies; claiming the full check overstates the deduction and invites IRS adjustment with interest.
Ignoring the MAGI phase-out — A single filer at $200,000 who claims $12,500 instead of $7,500 has overclaimed $5,000 and faces back tax.
Filing married-separately and claiming it — You are excluded; the deduction is disallowed and your refund shrinks.
Counting state-law or contract overtime — Non-FLSA overtime does not qualify, so the extra is reversed if claimed.
Assuming your state follows the federal break — Many states decouple; you can owe unexpected state tax plus interest.
Forgetting it does not cut FICA — Over-reducing your withholding leaves you short on payroll-tax-driven liability.
Throwing away pay stubs — For 2025 there may be no separate W-2 box, so without records you cannot prove the premium and may lose the deduction.

Do’s and Don’ts

Do isolate the premium-only portion of overtime, because that is the only amount the law allows.
Do calculate MAGI carefully, because a few thousand dollars over the line cuts your cap.
Do keep every 2025 pay stub, because employers were not required to report the figure separately that year.
Do check your state’s conformity, because federal and state answers can differ.
Do file jointly if married, because separate filers are barred from the deduction.
Don’t deduct double-time or contract overtime, because only FLSA-required premiums qualify.
Don’t lower your withholding as if overtime is fully tax-free, because that risks an underpayment penalty.
Don’t assume the deduction is permanent, because it sunsets after 2028.
Don’t claim it if your MAGI is above the band, because your cap is $0.
Don’t guess your status — verify FLSA eligibility, because exempt workers do not qualify.

Pros and Cons

Pro: Real tax savings — Eligible workers can cut federal income tax by hundreds to a couple thousand dollars, because up to $12,500/$25,000 leaves taxable income.
Pro: Available with the standard deduction — It is above-the-line, so you need not itemize to benefit.
Pro: Covers many hourly workers — Nurses, tradespeople, and first responders with FLSA overtime often qualify, because their premiums meet the rule.
Pro: Retroactive to 2025 — You can claim it on your first 2026-season return, because the law took effect that year.
Pro: Joint cap is larger — Two-earner couples share a $25,000 ceiling, because the cap doubles for joint returns.
Con: Income phase-out — Higher earners lose part or all of it, because the cap shrinks above $150K/$300K.
Con: Temporary — It disappears after 2028 unless extended, because Congress set a sunset.
Con: Premium-only and FICA-still-due — The savings are smaller than the slogan implies, because most of your overtime check still gets taxed.
Con: Self-calculation for 2025 — No required W-2 box that year means more work, because you must compute the premium yourself.
Con: State uncertainty — Your state may tax the overtime anyway, because conformity is not guaranteed.

What to Do Next

Confirm eligibility — Verify you are FLSA non-exempt and not married filing separately.
Gather records now — Pull all 2025 pay stubs showing overtime hours and rates, plus any employer box-14 statement.
Compute your premium — Add up the half-time premium portion of your overtime for the year.
Run the phase-out — Calculate MAGI, subtract the threshold, and find your reduced cap.
File Schedule 1-A with your Form 1040 by April 15, 2026, entering the lower of your premium or your cap.
Check your state — Visit your state revenue agency to confirm whether it taxes the overtime.
Call a pro if your MAGI is near the edge, your overtime is complex, or you must amend a prior return.

FAQs

What is the income phase-out for no tax on overtime?

It begins at $150,000 MAGI for single filers and $300,000 for joint filers for tax year 2025. Above that, the deduction drops $100 for every $1,000 of extra MAGI until it reaches zero.

At what income does the overtime deduction reach zero?

Around $275,000 MAGI for single filers and $550,000 for joint filers in 2025. Past those points, the $100-per-$1,000 reduction wipes out the entire cap, so you deduct nothing.

How much overtime can I deduct?

Up to $12,500 single or $25,000 joint for tax year 2025, and only the FLSA premium portion counts. Your actual deduction is the lower of that cap or the premium you earned.

Is all my overtime pay tax-free?

No. Only the “half” premium in time-and-a-half is deductible, and it still pays Social Security and Medicare taxes. The name is a slogan, not a full exemption.

Does the phase-out reduce my overtime or my deduction?

Your deduction. The phase-out shrinks the maximum cap you may claim, not the overtime you earned. A single filer at $170,000 sees the cap fall from $12,500 to $10,500.

Can I claim it if I’m married filing separately?

No. The IRS requires married taxpayers to file a joint return to claim the deduction. Filing separately disqualifies you entirely for 2025.

Does my state tax overtime too?

It depends on your state. Some follow the federal deduction, some decouple and tax it, and no-income-tax states never tax it. Check your state revenue agency before filing.

What form do I use to claim it?

Schedule 1-A, filed with Form 1040 for tax year 2025. You enter the lower of your premium overtime or your phased-out cap.

When does the overtime deduction expire?

After December 31, 2028. It applies to tax years 2025 through 2028 only and sunsets unless Congress extends it.

Does the deduction cut my Social Security or Medicare tax?

No. It reduces federal income tax only. Your overtime, including the premium, still owes the 7.65% FICA payroll tax.

Do salaried employees qualify?

Generally no. Most salaried workers are FLSA-exempt and are not overtime-eligible, so their extra hours do not produce qualified overtime compensation.

Will my W-2 show my qualified overtime?

Not necessarily for 2025. Employers were not required to report it separately that year, so you may calculate it yourself using IRS Notice 2025-69. Starting in 2026, separate reporting is required.

Word count: approximately 2,950 words of body content. This article reflects federal rules as of June 2026 for tax year 2025; confirm current figures with a licensed tax professional before filing.

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