New Tax Deduction Allows Workers to Subtract Overtime Pay from 2025 Taxable Income

A new tax deduction introduced under the "One Big, Beautiful Bill" permits workers to exclude a portion of their overtime wages from their 2025 taxable income. Eligible taxpayers can deduct up to $12,500 ($25,000 for joint filers), potentially reducing their tax burden when filing in 2026. The deduction applies only to overtime pay exceeding regular wages, capped at half of the worker's standard rate.

Employers must report qualified overtime earnings to both the IRS and employees, though precise reporting mechanisms remain under development for the 2025 tax year. Notably, W-2 forms won't feature a dedicated overtime pay box—workers should proactively consult payroll departments to calculate their potential deduction.

The provision's retroactive application through 2025 creates strategic opportunities for wage earners. Those with volatile overtime patterns may benefit disproportionately, particularly in sectors like healthcare, manufacturing, and transportation where extended shifts are common.