The New Deduction for Qualified Overtime Compensation
What It Means for You, Who Qualifies, and How Much You Can Deduct on Your 2025 Tax Return
What Is the New Overtime Deduction?
The IRS now allows taxpayers to deduct the overtime premium portion of their pay — the extra amount you earn above your regular hourly rate when you work more than 40 hours in a week.
This is a real, above‑the‑line deduction, meaning:
You can claim it even if you take the standard deduction
It reduces your Adjusted Gross Income (AGI)
It may increase your refund or lower your tax bill
This deduction applies to tax years 2025 through 2028.
What Counts as “Qualified Overtime Compensation”?
The IRS defines qualified overtime compensation as the FLSA‑required premium portion of overtime pay.
Here’s what that means:
Federal law requires overtime to be paid at 1.5× your regular rate
The extra 0.5× is the part that qualifies for the deduction
Example
If your regular rate is $20/hour:
Regular pay: $20
Overtime rate: $30
Qualified overtime compensation: $10/hour (the premium portion)
Only the premium portion qualifies — not the entire overtime wage.
How Much Can You Deduct? (IRS Limits)
The IRS sets an annual cap on how much qualified overtime compensation you can deduct.
Maximum Deduction Amounts
Up to $12,500 for Single, Head of Household, or Married Filing Separately
Up to $25,000 for Married Filing Jointly
These are maximums — your actual deduction depends on how much qualifying overtime premium you earned.
Income Phaseouts (Who Gets the Full Deduction)
The deduction begins to phase out at higher income levels.
Full deduction generally available if:
Your Modified AGI is under $100,000
Phaseout range (approximate IRS guidance):
Begins around $100,000
Fully phased out around $150,000
Most workers earning under $100k will qualify for the full deduction, assuming they have enough qualifying overtime.
Who Qualifies for the Deduction?
You may qualify if:
You are an employee who earns overtime
Your overtime is paid according to federal rules (time‑and‑a‑half after 40 hours)
Your income is within the allowed range
You received the overtime in 2025 or later
Your employer reports your overtime correctly on your W‑2
Workers most likely to benefit:
Hospitality and restaurant workers
Retail and grocery employees
Warehouse and distribution workers
Healthcare professionals
Trades and construction workers
Manufacturing and production employees
Security, transportation, and logistics workers
If overtime is a normal part of your paycheck, this deduction is designed for you.
What Are the Benefits?
This deduction can:
Reduce your taxable income
Increase your refund
Offset the feeling that “overtime is taxed more”
Help workers who rely on overtime to support their families
Lower your AGI, which may help you qualify for other credits
For many households, this deduction will be one of the most valuable new tax benefits available.
Important: Not All Overtime Qualifies
Some overtime does not count toward the deduction:
Overtime paid at rates above the FLSA minimum (e.g., double time)
Bonuses or shift differentials
Comp‑time arrangements
Overtime for exempt employees
Overtime not properly separated on your paystub
This is why professional review matters — the IRS expects accuracy.
How to Know Your Exact Deduction Amount
Your W‑2 will not show the qualified overtime premium separately.
Your paystubs may not break it out clearly either.
To calculate your deduction correctly, we must:
Determine your regular rate
Identify your overtime rate
Separate the premium portion
Total all qualifying overtime premiums for the year
Apply the IRS deduction cap
Apply the phaseout rules based on your income
This is not something most taxpayers can do on their own without risking errors.
Why You Should Contact Avari Tax Before Filing?
This deduction is new, technical, and easy to miscalculate.
At Avari Tax & Financial Services, we:
Review your paystubs and W‑2 for qualifying overtime
Calculate the exact deductible amount
Apply the correct income phaseout rules
Ensure your return is accurate and compliant
Maximize your refund under the new law
Explain everything in plain English
If overtime is part of your income, this deduction could put real money back in your pocket — but only if it’s handled correctly.
Ready to See If You Qualify?
If you earned overtime in 2025, you may be eligible for a significant new deduction.
Let us help you calculate it accurately and make sure you get every dollar you’re entitled to.
Visit AvariTax.com or contact us directly to get started.
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