The federal deduction commonly called “no tax on overtime” starts with tax year 2025 and expires on December 31, 2028. It was created by the One Big Beautiful Bill Act, signed into law on July 4, 2025, and applies to overtime earned in tax years beginning after December 31, 2024.1Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors Unless Congress extends it, overtime pay returns to being fully taxable for federal income tax purposes starting in 2029.2U.S. House of Representatives. Frequently Asked Questions: Tax Changes 2026 and the One Big Beautiful Bill
So the eligible years are 2025, 2026, 2027, and 2028. Four tax years, then it sunsets.
What the 2025 Start Date Means in Practice
Overtime you worked at any point during calendar year 2025 can qualify, since the law reaches back to cover the full first tax year. The catch is that the reporting infrastructure was not in place when 2025 began. Many employers were not yet set up to separately track the premium portion of overtime pay, so workers claiming the deduction for 2025 may need to calculate it themselves from pay stubs. The deduction has to be claimed manually on the return, and simply having overtime listed in Box 14 of your W-2 is not enough to trigger it.
Starting with the 2026 tax year, employers are required to report qualified overtime compensation on the W-2 in Box 12 using a new code TT.3Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3 Federal withholding tables may also be adjusted in 2026 to account for the deduction, which could modestly increase take-home pay on each paycheck. For 2025, though, the benefit is generally realized at filing time rather than through reduced withholding.
What Expires on December 31, 2028
The provision was codified as Section 225 of the Internal Revenue Code and carries a hard sunset date of December 31, 2028.4Internal Revenue Service. Guidance for Individual Taxpayers Who Received Qualified Tips or Overtime2U.S. House of Representatives. Frequently Asked Questions: Tax Changes 2026 and the One Big Beautiful Bill Overtime earned in 2029 and later is fully taxable at the federal level unless new legislation extends the deduction. If you are planning around the tax break for household budgeting, a mortgage application, or a decision about picking up extra shifts, the four-year window is the horizon to work with.
What the Deduction Covers Inside That Window
The dates matter, but so does the scope, because “no tax on overtime” is narrower than the phrase suggests. A few boundaries worth knowing before you count on the deduction:
- Only the premium portion of overtime is deductible, not the full pay for overtime hours. If your regular rate is $20 and time-and-a-half pushes it to $30, the deductible amount is the $10 premium per hour.2U.S. House of Representatives. Frequently Asked Questions: Tax Changes 2026 and the One Big Beautiful Bill
- The overtime must be the kind required by Section 7 of the Fair Labor Standards Act. Overtime required only by state law or a union contract, but not by the FLSA, does not qualify.5U.S. Department of Labor. Overtime Pay
- The annual cap is $12,500 for single filers and $25,000 for joint filers, with a phase-out beginning at $150,000 of modified adjusted gross income for singles and $300,000 for joint filers.6Internal Revenue Service. Treasury, IRS Provide Guidance for Individuals Who Received Tips or Overtime During Tax Year 2025
- Social Security and Medicare taxes still apply to overtime pay in full. The deduction reduces federal income tax only.3Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
- Salaried employees who are exempt from FLSA overtime, along with independent contractors and self-employed workers, are not eligible.7U.S. Department of Labor. Fact Sheet 17A: Exemption for Executive, Administrative, Professional, Computer and Outside Sales Employees
The deduction is above-the-line, so you can claim it whether or not you itemize.1Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors
State Timelines Are Separate
Your state’s treatment of overtime runs on its own calendar. States with “rolling conformity” to the Internal Revenue Code generally follow the federal deduction automatically. Iowa, for instance, will not tax qualified overtime for state purposes through 2028, matching the federal window.8Iowa Department of Revenue. Impact of One, Big, Beautiful Bill Act on Employee Withholding New York, California, Illinois, and Colorado have decoupled, meaning overtime remains fully taxable at the state level despite the federal break. Other states are still deciding through their 2026 legislative sessions.
Even in conforming states, withholding may lag. Iowa has noted that its 2026 W-4 cannot be modified for the overtime deduction, so workers there will see the benefit at filing time rather than in each paycheck.8Iowa Department of Revenue. Impact of One, Big, Beautiful Bill Act on Employee Withholding
Alabama had its own state-level overtime exemption predating the federal law, created by Act 2023-421 and starting January 1, 2024.9Alabama Administrative Code. Alabama Code 810-3-72-.02 – Exemption of Overtime Pay for Full-Time Hourly Wage Paid Employees10Alabama Department of Revenue. Overtime Pay Exemption – Amended Alabama workers still qualify for the federal deduction on their federal returns, but the separate state break has ended.