Why It Matters

The deduction, created by the One Big, Beautiful Bill Act signed into law on July 4, 2025, allows workers to exclude certain overtime pay from taxable income through 2028. A Congressional Research Service (CRS) report finds that more than 29 million filers claimed it in tax year 2025, more than the roughly 10 to 11 million workers the Yale Budget Lab estimated actually performed Fair Labor Standards Act-covered overtime work in 2023.

The Big Picture

The deduction permits single filers to exclude up to $12,500 of qualified overtime compensation annually, while married couples filing jointly can exclude up to $25,000. The benefit phases out at $100 per $1,000 of income above $150,000 for single filers and above $300,000 for joint filers. Critically, qualified overtime compensation is defined narrowly: it covers only the additional 50% premium pay required under Section seven of the Fair Labor Standards Act, excluding base wages for overtime hours, tips, and overtime paid solely under state law or employer policy.

Yet the legislation's actual uptake tells a different story. The average deduction claimed was greater than $3,100. The 29 million claimants represent roughly 20% of all returns filed as of May 8, according to the Treasury Department's count. This vastly exceeds the universe of workers eligible for federal overtime protections, let alone those who regularly work overtime hours.

The Joint Committee on Taxation estimated in December 2025 that the deduction would cost the federal government $89.6 billion from fiscal year 2025 through 2029, with annual costs running approximately $22 to $23 billion during fiscal years 2026 through 2028. The Internal Revenue Service (IRS) waived penalties for inaccurate information returns for tax year 2025.

The Bottom Line

Congress faces a choice as the deduction approaches its 2028 sunset. Several lawmakers have introduced bills to expand eligibility to overtime work not covered by federal law, including work performed under collective bargaining agreements or any pre-arranged employer-employee arrangement exceeding 40 hours per week.

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