How does the deduction for qualified overtime ("no tax on overtime") work?

What counts as qualified overtime

IRC §225(c)(1) defines qualified overtime compensation as overtime pay required under section 7 of the Fair Labor Standards Act (29 U.S.C. §207) that is in excess of the regular rate the person is paid. Under the FLSA, covered workers generally get at least one and one-half times their regular rate for hours over 40 in a workweek. Only the premium above the regular rate counts, not the whole overtime paycheck.

Example: a worker paid $30 an hour who works 10 FLSA overtime hours at $45 earns $450 of overtime pay. The qualified overtime is the $15 premium × 10 hours = $150.

Overtime paid only because of a state law, a union contract or employer policy, rather than the FLSA, isn't covered by this definition. Qualified tips don't count either (IRC §225(c)(2)).

The amount must be on a statement furnished to the worker, such as Form W-2 (IRC §225(a)).

Limits

• Cap: $12,500 per year, or $25,000 on a joint return.
• Phase-out: reduced by $100 for each $1,000 of modified AGI above $150,000 ($300,000 joint). Modified AGI is AGI plus amounts excluded under IRC §§911, 931 and 933.

Other requirements

• Social Security number: the return must include the taxpayer's SSN, as defined in IRC §24(h)(7) (IRC §225(d)).
• Married taxpayers must file jointly (IRC §225(e)).
• Years: no deduction for taxable years beginning after December 31, 2028 (IRC §225(g)). It applies to taxable years beginning after December 31, 2024.