The Internal Revenue Service has released updated guidance on the ‘no tax on overtime’ deduction to address confusion that arose during the earlier filing season. The deduction, established through legislation signed into law in July 2025, allows eligible workers to exclude a portion of their overtime pay from taxation through the 2028 tax year.
Under the program, qualifying workers can deduct up to $12,500 for single filers or $25,000 for married couples filing jointly. The deduction applies specifically to the overtime premium—the additional half of the 1.5 times multiplier required under the Fair Labor Standards Act for hours worked beyond 40 per week. For example, if a worker’s regular hourly rate is $40 and overtime rate is $60, only the $20 premium qualifies. The benefit phases out at incomes of $150,000 for individuals and $300,000 for joint returns.
A significant change for the 2026 tax year is the requirement that employers report eligible overtime deduction amounts on workers’ W-2 forms using a designated code. This marks a substantial shift from the 2025 tax year, when employers were not required to report this information, forcing many workers to calculate their own deductions using pay stubs. According to Treasury Department data, over 29 million taxpayers claimed this deduction in the most recent filing season, with an average deduction exceeding $3,100.
Tax professionals note that the enhanced employer reporting should simplify compliance, though they recommend workers verify the accuracy of reported amounts. If discrepancies are identified, workers must request corrected W-2 forms from their employers rather than self-correcting the deduction amount on their returns. The updated IRS guidance also clarifies that only overtime requirements under federal law qualify for the deduction, not additional overtime provisions mandated by state law or union agreements.
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