The qualified overtime deduction created by the 2025 tax law begins to shrink once a taxpayer’s modified adjusted gross income passes $150,000, or $300,000 on a joint return, according to the IRS’s Fact Sheet FS-2026-13. The same fact sheet limits the deduction to the premium portion of overtime pay that federal wage law requires, which is the extra half of “time and a half” and not the whole overtime paycheck.
The law allows a deduction of up to $12,500 of qualified overtime compensation per individual return, or $25,000 on a joint return, and the IRS updated the fact sheet in August 2026. Where an employer reports the amount, and which part of the pay counts, decides how much of that ceiling a given worker can reach.
The reduction starts at $150,000 of modified adjusted gross income
The IRS fact sheet states that the deduction is reduced if “a taxpayer’s modified adjusted gross income (MAGI) for the tax year exceeds $150,000 ($300,000 for joint filers).” Modified adjusted gross income is the measure, not overtime or wages alone. The word that matters in the title is “starts”: the reduction begins at the threshold and works as a phase-out. It does not remove the deduction for a taxpayer one dollar over the line.
How many cents of deduction disappear for each dollar over the threshold is not stated in the IRS pages reviewed for this report, so no rate is given here. The fact sheet supplies the two thresholds and the two caps.
The deduction is available to taxpayers who itemize and to those who take the standard deduction, the fact sheet says. An IRS newsroom page on the new deductions gives the same two thresholds and the same $12,500 and $25,000 limits, and states that the provision is effective for 2025 through 2028.
Only the half-time premium qualifies
The fact sheet defines the qualifying amount with a formula in its FAQ 12: the number of hours worked over 40 in a workweek that are required to be paid overtime under the Fair Labor Standards Act, multiplied by one-half, multiplied by the employee’s regular rate of pay under that law. The result is the premium, not the full overtime wage. The sheet adds a direct limit: “Overtime compensation not required by the FLSA is not eligible for the deduction.”
The formula can be run on a hypothetical, not taken from the IRS. For a worker with a regular rate of $20 an hour who works 45 hours in a week, the five overtime hours are paid at $30, for $150. The qualifying premium is 5 hours times one-half times $20, which is $50. The other $100 of that overtime pay is ordinary wages for the five hours and does not count.
Under that sentence, pay above what the federal law requires falls outside the definition. The deduction also does not change how the pay is taxed in the paycheck. The fact sheet states that overtime compensation “is not excludible or exempted from wages for purposes of employment taxes,” which covers income tax withholding, Social Security and federal unemployment taxes. The deduction reduces taxable income on the return and leaves payroll taxes where they were.
The employer’s box and the worker’s schedule
Two different parties control two different pieces of the claim. Beginning with tax year 2026, the fact sheet says payors and employers must separately report qualified overtime compensation, “more commonly” on Form W-2 in box 12 with code TT. Payors that report on information returns use Form 1099-NEC box 1d or Form 1099-MISC box 14. The employer decides the figure that appears, and the formula depends on hours and rates in the employer’s payroll records.
The worker’s side is the return. The fact sheet says the deduction is computed on Schedule 1-A of Form 1040, or its successor. The deduction also carries filing conditions: the employee who received the overtime must have a valid Social Security number, and a married employee and spouse must file a joint return.
When the employer’s number is wrong, the fact sheet puts the next step with the employer. If an employer omits or understates the amount in box 12 under code TT, the fact sheet’s FAQ 22 says the employee must request a corrected Form W-2, a Form W-2c, from the employer in order to claim the deduction.
Returns for 2026 are the first with the new W-2 box
Which tax year the figures belong to is the main place a reader of the fact sheet can go wrong. The deduction runs from 2025 through 2028, but the separate-reporting requirement began with 2026. The fact sheet states that for 2025 the IRS granted relief from the reporting requirement, “meaning employees might not see an entry for qualified overtime compensation on their Form W-2 for 2025 even though they earned qualified overtime compensation.” Returns for 2026, filed in 2027, are the first for which an employer must report the amount in box 12 under code TT.
The fact sheet was revised in August 2026 to delete material that applied only to the 2025 taxable year, so the $150,000 and $300,000 thresholds in it are the ones stated for the years beginning with 2026. Nothing in the fact sheet makes paid tax preparation a condition of taking the deduction. The schedule attaches to Form 1040, which a taxpayer can file directly with the IRS.
The IRS names no individual official on the fact sheet, which is issued as Fact Sheet FS-2026-13 and tagged to Public Law 119-21. Its text, with the $150,000 and $300,000 thresholds, the half-time premium formula and the box 12 code TT instruction, is the controlling record for each point above.
When an IRS refund or notice stalls after filing
The IRS Refund Recovery Kit is written for taxpayers whose refund is late, reduced or offset, or who are holding an IRS notice they cannot place. Each status message and each notice points to a different cause, and each cause has its own next step.
The IRS Refund Recovery Kit includes a notice decoder and a refund status tracker spreadsheet, along with the refund-trace steps that use Form 3911.
Open the IRS Refund Recovery Kit notice decoder →
This article was produced with AI assistance and checked against the primary sources linked above.
Warren Cohen is a finance writer based in Phoenix, Arizona, covering personal finance topics including credit, banking, and beginner investing. He earned his degree in business administration from Arizona State University and began his career working in consumer finance, where he gained direct experience with lending and credit systems. He now writes for personal finance websites and fintech platforms, focusing on clear, practical content that helps readers make informed financial decisions.
