New Overtime Deduction for 2025–2028: Key Clarifications from the November 2025 IRS Guidance

After releasing formal guidance in November 2025, the IRS clarified how the new overtime deduction will apply for tax years 2025 through 2028. The guidance confirms that the deduction applies only to the overtime premium required under the Fair Labor Standards Act (FLSA), not to the full time-and-a-half rate that many workers receive. As a result, individuals who work significant overtime may find the allowable deduction smaller than they originally anticipated.

Under these rules, only the “half-time” portion of overtime pay is deductible—that is, the amount paid above the regular hourly rate. For example, if a worker earns $25 per hour and receives $37.50 for overtime, only the $12.50 premium qualifies. The full overtime amount does not. The IRS also reaffirmed that the overtime must be required under the FLSA and reported on a Form W-2, Form 1099, or another approved statement in order to meet the definition of qualified overtime compensation.

The guidance maintains the maximum annual deduction of $12,500 for single filers and $25,000 for joint filers, with phaseouts beginning at modified adjusted gross income levels of $150,000 and $300,000, respectively. The deduction is available to both itemizing and non-itemizing taxpayers, provided they include their Social Security number on the return, and married couples must file jointly to claim it. Employers and other payors are required to report total qualified overtime compensation to the IRS (or SSA) and to employees, which should help taxpayers determine the deductible portion, though many may still need to review their pay information carefully.

The IRS also announced transition relief for the 2025 tax year to support both taxpayers and employers as they adjust to the new rules and reporting obligations. While the guidance provides clearer definitions and expectations, it also confirms that only a portion of overtime wages qualifies for the deduction—an important distinction for workers who may have initially expected their entire time-and-a-half earnings to be deductible.

The information provided in this blog post is intended for general informational purposes only and should not be construed as legal or tax advice. While every effort has been made to ensure the accuracy of the information, tax laws and regulations are subject to change, and individual circumstances may vary. For personalized advice and to ensure compliance with current tax laws, it is strongly recommended that you consult with a qualified tax professional, financial advisor, or legal counsel. The author and publisher of this blog assume no responsibility for any errors or omissions, or for any actions taken based on the information contained herein.