The deduction was created by the wide-ranging tax and spending law enacted in July 2025, commonly called the One Big Beautiful Bill Act (OBBBA). It applies to tax years 2025 through 2028.
Because the law passed midway through 2025, tax forms were not redesigned to identify qualified overtime that year. The IRS temporarily allowed workers to calculate the deduction using W-2 information, pay statements, or other employment records.
Beginning in 2026, workers receiving W-2 forms cannot claim more qualified overtime than their employers report in Box 12 under Code TT. An employee who finds an omission or understatement will need to ask their employer for a corrected W-2. Employers will need to correct discovered errors, as pay stubs and personal calculations won't be able to substitute for a corrected form if an employer refuses or is unable to provide one.
The deduction also applies even if income is less than the phrase “no tax on overtime” may suggest. For most workers receiving time-and-a-half, only the additional half-time premium required under the federal Fair Labor Standards Act qualifies—not all wages earned during overtime hours.
In one IRS example, an employee earns $20 an hour, works 10 overtime hours, and receives double time. The worker receives $400 for those hours, including $200 in regular wages and $200 in premium pay. Federal law requires only a $100 premium, so just that $100 qualifies for the deduction.
The deduction is capped at $12,500 for individual returns and $25,000 for joint returns. It begins to phase out above $150,000 in modified adjusted gross income for individual filers and $300,000 for joint filers.