No tax on overtime

What is the 41st hour of the week worth? For most hourly workers, federal wage law says at least time-and-a-half. Until 2025, it was also the hour Washington taxed at the worker's highest rate, because overtime sits on top of everything else earned that year.

Think of time-and-a-half as a cake with frosting. The "time" is the cake: the regular wage for that hour. The "half" is the frosting: the extra pay the law requires for hours past 40. President Trump's 2025 tax law takes federal income tax off the frosting.

Who gets the frosting

Starting with 2025 returns, workers can deduct the premium portion of overtime the Fair Labor Standards Act requires, up to $12,500 a year, or $25,000 for married couples filing jointly. You need a Social Security number valid for work, and you can claim it whether or not you itemize. The deduction shrinks by $100 for every $1,000 of income above $150,000, or $300,000 for couples, and it lasts only through tax year 2028.

Take a hospital nurse paid time-and-a-half who picked up $15,000 in overtime pay last year. Using the method in the IRS's own examples, she can deduct $5,000, the one-third of that pay that is premium. In the 12% bracket, that keeps $600 at home; in the 22% bracket, $1,100.

Treasury reports that more than 29 million filers claimed the deduction in its first season, with an average deduction above $3,100. Three out of four of them earned under $100,000, and 96% earned under $200,000. Those counts are Treasury's; the IRS's published filing-season statistics do not break them out.

A salaried manager who stays until nine gets nothing from this. Neither do many long-haul truck drivers, whom federal law exempts from overtime pay, nor workers whose extra pay comes only from a union contract or a state rule, and Social Security and Medicare taxes still apply to the full overtime check. All true. But the law follows the line federal wage rules already draw between hourly and salaried work, and Treasury's numbers show the people on the hourly side are overwhelmingly middle-class.

What to check next year

Your 2026 W-2 should report qualified overtime in box 12 under code TT. Compare it with your last pay stub of the year. If your employer pays double time, only the half that federal law requires counts, so do not be surprised when the number is smaller than your total overtime.

The cake still gets taxed like any other wage. Make sure you keep all the frosting.