What exactly is deductible
Only the premium required by the Fair Labor Standards Act: the extra half-time portion of time-and-a-half pay. At a $20 rate, the $30 OT hour contains $20 of ordinary wages (taxed normally) plus a $10 premium (deductible). FLSA double-time premiums also qualify; state-law daily overtime premiums and contractual premiums above the FLSA minimum do not.
Caps and phase-out
The deduction caps at $12,500 of premium per year for single and married-filing-separate filers, $25,000 for joint filers. Above $150,000 of modified AGI ($300,000 joint) the deduction shrinks by $100 for every $1,000 over — so it disappears entirely around $275,000 single / $550,000 joint in premium-maxing cases. It is available whether you itemize or take the standard deduction, and no W-4 change is needed.
Who it helps most
- Hourly workers with steady overtime: a $25/hour worker averaging 10 OT hours/week earns about $8,700 of premium a year — most of it deductible.
- Public safety and manufacturing shift workers, where OT is structural.
- High-OT years (strike coverage, peak season) can stack premium toward the cap without hitting it.
What the rule does not do
- It does not exempt overtime from Social Security and Medicare tax — 7.65% applies to every OT dollar.
- It does not automatically exempt state income tax — most states tax OT as ordinary wages.
- It does not apply in 2029+ unless Congress extends it.
How the deduction reaches you
Employers may adjust federal withholding on overtime during the year, but the guaranteed mechanism is your 2026 return: W-2 reporting of qualified overtime premium, then the deduction on Form 1040. Expect refund season to be where the benefit lands for most workers.