⏰💸 2025 Overtime (OT) Deduction — “Save Up to $12,500 Just From Overtime Pay!”
Starting in tax year 2025, a brand-new provision allows workers to deduct a significant portion of their overtime compensation.
For the 2025–2028 period, eligible employees can deduct up to $12,500 (Single) or $25,000 (Married Filing Jointly) from their taxable income.
For taxpayers with MAGI at or below $150,000, the deduction can be applied in full, offering a major tax break for nurses, warehouse workers, shift-based employees, hospitality workers, and transportation staff.
1️⃣ Key Features of the 2025 Overtime Deduction
The new Qualified Overtime Compensation Deduction applies only to overtime pay that meets federal labor standards (FLSA).
This tax rule is completely separate from the new tip-deduction rule introduced in 2025.
- Deduction amount depends on Modified Adjusted Gross Income (MAGI)
- Only FLSA-qualified overtime (1.5x rate) is eligible
- Does not include tip income or bonus/shift differential pay
- Available only for tax years 2025 through 2028
Single: Up to $12,500 deduction
Married Filing Jointly: Up to $25,000 deduction
If MAGI exceeds $150,000 → Deduction reduced by $100 per $1,000 of excess income
(Accurate for 2025 OBBBA rules)
2️⃣ Who Qualifies for the Deduction?
To claim the overtime deduction, all of the following must be true:
- You are a W-2 employee
- Your overtime pay follows FLSA Section 7 rules (1.5× overtime rate)
- You are not including tips, service charges, or bonus-type income
- Your MAGI is within the eligible threshold for full or partial deduction
3️⃣ Examples — How the Deduction Works
Reduction Amount =
(MAGI − $150,000) ÷ $1,000 × $100
This formula applies only when MAGI exceeds $150,000.
MAGI: $98,000
Overtime earned in 2025: $9,600
Because MAGI is below $150,000, there is no reduction.
Deductible amount: $9,600 (under the $12,500 limit)
💡 Example 2 — Married Filing Jointly
MAGI: $172,000
Overtime earned in 2025: $30,000
Excess MAGI over $150,000: $22,000
Reduction: (22,000 ÷ 1,000) × $100 = $2,200
Maximum OT deduction allowed: $25,000 − $2,200 = $22,800
Because overtime earned ($30,000) is higher than this limit,
Deductible amount: $22,800
4️⃣ EA Tax Tips — Mistakes to Avoid
• Claiming overtime deduction on bonus or hazard-pay income
• Forgetting to adjust MAGI for pre-tax HSA or retirement contributions
• Mixing tip deduction with overtime deduction (they are fully separate provisions)
Only FLSA-qualified overtime can be used for this deduction.
5️⃣ Internal & External Links
6️⃣ Final Thoughts — A Major Opportunity for W-2 Workers
This temporary tax break provides one of the most meaningful savings opportunities for W-2 employees who regularly work overtime.
Industries like healthcare, logistics, manufacturing, and transportation will especially benefit.
Managing MAGI strategically can help maximize the deduction and reduce federal tax liability significantly over the next four tax years.