New Tax Break Caps Overtime Deduction at $10,000, Starting in 2026

The Overtime Wages Tax Relief Act creates a brand new federal income tax deduction specifically for money earned working overtime. Under this bill, taxpayers can deduct up to $10,000 of their annual overtime compensation, which is defined as pay received at a rate of one-and-a-half times the normal rate for hours worked over a set threshold, usually 40 hours a week. This new deduction is set to apply to tax years beginning after December 31, 2025, giving the IRS and employers a full year to get their systems ready.

The $10,000 Cap and the $100,000 Cliff

This isn't a benefit for everyone, and that's by design. The deduction is capped at $10,000, meaning if you earn $15,000 in overtime, you only get the tax break on the first $10,000. More importantly, it features an income limit designed to target middle-income workers. If your Modified Adjusted Gross Income (MAGI)—which is essentially your income before certain deductions, plus some foreign income exclusions—goes over $100,000, the deduction starts shrinking. For every $1,000 you earn over that $100,000 threshold, the deduction is reduced by $50. This means that if you’re a high earner bringing in significant overtime, this particular tax break likely won't apply to you, or the benefit will be minimal.

How It Works for Regular Taxpayers

One of the smarter parts of this bill is how it handles the two main ways people file taxes. Whether you’re one of the millions who takes the standard deduction (non-itemizer) or you itemize your deductions, you still get this benefit. For the standard deduction crowd, this new overtime deduction is simply added right into your existing standard deduction amount. For those who itemize, it’s treated as a separate deduction, meaning it won’t get caught up in the complex limitations that often apply to other itemized deductions. This structure ensures that a wide range of workers—from the construction foreman putting in 60-hour weeks to the nurse working double shifts—can benefit from the tax relief on those extra hours.

The Administrative Headache for Employers

While this is a welcome tax break for workers, it means more paperwork and systems updates for employers and the Treasury Department. The bill requires the IRS to update tax forms so employers must specifically report the total amount of qualifying overtime compensation paid to each employee. Furthermore, the Treasury Department has to redo the entire withholding system and tables. This is a big lift. It means that when employers calculate how much tax to take out of an employee's paycheck, they’ll have to factor in this new deduction, which could make overtime paychecks look bigger right away. For the payroll departments of small and large businesses alike, this transition period before January 1, 2026, will involve significant administrative work to ensure they are reporting and withholding correctly.