The Internal Revenue Service has released updated guidance on the “no tax on overtime” deduction, a federal tax break that permits eligible workers to exclude a portion of their overtime compensation from taxable income. The clarifications address confusion that arose during the filing season earlier this year, when workers filed their 2025 returns.
The deduction was established through the One Big Beautiful Bill Act, which was signed into law in July 2025. It represents one of several temporary tax breaks available to taxpayers through 2028, alongside deductions for auto loan interest, tip income, and an additional deduction for taxpayers ages 65 and older. Eligible workers can exclude up to $12,500 in qualifying overtime for single filers or $25,000 for married couples filing jointly. The deduction applies specifically to overtime pay covered under the Fair Labor Standards Act, which mandates that nonexempt employees receive at least 1.5 times their regular pay rate for hours worked beyond 40 per week.
A key distinction in the deduction is that it applies only to the “overtime premium,” which represents the extra half of the 1.5 multiplier rather than the full overtime amount. The tax benefit begins phasing out at income thresholds of $150,000 for single taxpayers and $300,000 for joint returns. Data from the Treasury Department indicates that more than 29 million taxpayers claimed this deduction for the most recent tax season, with an average deduction exceeding $3,100.
A significant administrative change for the 2026 tax year involves employer reporting requirements. Beginning with 2026 returns, employers must include the eligible overtime deduction amount on workers’ W-2 forms using a “TT” code in box 12. This requirement addresses challenges faced by workers filing 2025 returns, when many had to calculate their own eligible amounts using payroll statements or final pay stubs, potentially leading to calculation errors.
For the 2025 tax year, the IRS and Treasury Department temporarily waived the employer reporting requirement due to systems limitations and pending updates to tax forms. Workers who believe their employer has reported an incorrect amount on their W-2 must request a corrected form rather than making adjustments independently on their tax returns.
Article Attribution | Read More at Article Source
Article summary produced by Claude AI