1. The Deduction, Not the Exemption
Headlines said "no tax on overtime." The law that took effect for 2025 returns says something more precise: eligible workers may **deduct up to $12,500 per year of qualified overtime compensation ($25,000 on a joint return)** on the new Schedule 1-A, whether they take the standard deduction or itemize, for tax years 2025 through 2028. Overtime is still wages, still taxed — the deduction reduces your taxable income by the qualifying amount.
2. What Actually Qualifies
Three rules narrow it: 1. **FLSA overtime only.** The extra pay must be overtime that the Fair Labor Standards Act *requires* — the time-and-a-half above 40 hours for covered, non-exempt workers. Overtime your employer offers voluntarily, comp time, shift differentials, and bonuses do not qualify. 2. **The premium portion only.** This is the nuance most people miss: the qualified amount is generally the *extra* pay above your regular rate — the "and-a-half" — not the whole overtime check. If you earn $20/hour and get time-and-a-half ($30) for overtime hours, the qualified portion is the $10 premium per hour, not $30. 3. **Below the phase-out.** The deduction shrinks once modified AGI exceeds **$150,000** ($300,000 joint), and you need a valid SSN — married workers must file jointly to claim it.
3. Your 2026 W-2 Shows the Qualifying Amount
For 2026, employers may report qualified overtime compensation in **Box 12 with Code TT**, which is the number your return works from. If you also receive tips, the qualified tips amount appears separately with Code TP — see our qualified tips deduction guide for that half of Schedule 1-A. Full W-2 walkthrough here: How to Read Your W-2.
4. Example
A warehouse worker earns $22/hour and works 200 overtime hours at $33 (time-and-a-half). Total overtime pay: $6,600. Qualified premium portion: $11/hour x 200 = **$2,200** — that is the deductible amount, not $6,600. The difference between those two numbers is exactly the kind of thing a preparer's review catches before the IRS does.
5. Illustration, Not a Promise
*The example above is an illustration only. Your qualifying amount depends on your pay structure, whether your overtime was FLSA-required, your income relative to the phase-out, and the amounts your employer reports.*
6. Salaried and Exempt Workers
If you are exempt from the FLSA's overtime requirements — most salaried professional roles — there is generally no FLSA overtime pay, so there is generally nothing qualified to deduct. Workers whose "overtime" comes as straight time or comp days are in the same position.
7. How It Gets Claimed
Schedule 1-A carries all four new deductions — overtime, tips, car loan interest, and the senior deduction — and we walk through the whole set in above-the-line deductions explained. The hospitality-worker version, including what to bring to your appointment, is our tips and overtime guide. Bring your final pay stubs showing overtime hours and rates, and your W-2. We will verify the numbers against what Box 12 reports. Book a consultation. This article is general information for tax year 2026, not tax advice. FLSA coverage and IRS guidance on qualified amounts control — verify current rules before filing.