The Internal Revenue Service has released updated guidance on the overtime tax deduction that was introduced through federal legislation signed into law in July 2025. The clarifications address confusion that arose when workers filed their 2025 tax returns earlier this year, according to tax policy experts.
Under the program, eligible workers can deduct a portion of overtime compensation—capped at $12,500 for single filers or $25,000 for joint filers—from their taxable income. The deduction applies to overtime pay governed by the Fair Labor Standards Act, covering nonexempt employees who earn at least 1.5 times their regular rate for hours worked beyond 40 per week. Critically, only the overtime premium portion—the additional half of the 1.5 multiplier—qualifies for the deduction. The tax benefit begins phasing out at income thresholds of $150,000 for single taxpayers and $300,000 for those filing jointly.
For the 2026 tax year, a significant procedural change will ease compliance. Employers are now required to report the deduction-eligible overtime amount on workers’ W-2 forms using a designated code, eliminating the need for individual taxpayers to calculate their own deduction amounts. During the 2025 filing season, this employer reporting requirement was waived due to system limitations, forcing many workers to estimate eligible amounts from pay stubs.
Data from the Treasury Department indicates that over 29 million taxpayers claimed the deduction for the 2025 tax year, with an average deduction exceeding $3,100. The vast majority of claimants had incomes below $200,000. Tax professionals note that the move to employer-reported figures may result in lower deductions for some workers in 2026 if previous estimates were inflated. Experts recommend that workers verify the accuracy of overtime information appearing on their W-2s and request corrections if discrepancies are identified, as workers cannot unilaterally adjust reported amounts on their returns.
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