"No tax on overtime," in plain English: who can deduct it, and how much

A plain-English read on the new federal overtime deduction — what it is, the dollar limits, the income phase-out, and who in a beach-cities household is actually likely to use it. Written from the IRS's own guidance. General information, not tax advice.

One of the more talked-about pieces of the 2025 federal tax law — the "no tax on overtime" break — is now spelled out in IRS guidance. Here is what it does and doesn't do, without the slogan.

What it actually is

It is a deduction, not a repeal of tax on overtime. Starting with the 2025 tax year, an eligible worker can subtract a portion of their overtime pay from taxable income — on top of the standard deduction, so you don't have to itemize to use it. The IRS caps the deduction at $12,500 of qualified overtime compensation per return, or $25,000 on a joint return. That's the amount you can deduct, not the tax you save; the actual dollars back depend on your bracket.

What counts as "qualified overtime"

Only the premium half counts. The IRS defines qualified overtime as pay "required under section 7 of the Fair Labor Standards Act that exceeds the regular rate" — in other words, the extra bump above your normal hourly rate that federal law requires for hours past 40 in a week, not your full time-and-a-half paycheck. Overtime paid under a contract or state rule but not required by the FLSA doesn't qualify.

The income phase-out

This is the part that matters most in Manhattan Beach and Hermosa. The deduction starts phasing out once modified adjusted gross income (MAGI) tops $150,000 for a single filer or $300,000 for joint filers. In two towns where the largest single income bracket is "$200K and up," a lot of primary earners will be over the line. Where it can still land: a lower-earning spouse, a young adult or college-age kid working an hourly summer job with real FLSA overtime, or a household whose income sits under those thresholds.

A reporting wrinkle for 2025

For the 2025 tax year, employers were not required to report qualified overtime separately on your W-2 or 1099s — separate reporting becomes mandatory beginning in 2026. So for the first year, figuring out your qualifying overtime figure may take a little work with your pay records. This is exactly the kind of number worth confirming with your CPA or tax preparer — specifically, the qualified-overtime amount that flows onto the deduction line — rather than eyeballing it off a pay stub.

The short version

A new above-the-line deduction of up to $12,500 (single) or $25,000 (joint) for the FLSA-required overtime premium, phasing out above $150K / $300K MAGI. Great for a moderate-income second earner or a working student; largely phased out for a high-earning primary breadwinner. The 2025 reporting gap means the underlying number may need to be reconstructed from pay records this first year.

Source: IRS, "Questions and Answers about the New Deduction for Qualified Overtime Compensation" (irs.gov). Dollar limits, the FLSA definition, the MAGI phase-out thresholds, and the 2025 reporting relief are quoted from that guidance. This is general information, not tax advice; your CPA can confirm how it applies to your return.