No Tax on Overtime Rules: Caps & Limits
Overtime Deduction Rules and Limits
The OBBBA overtime deduction (P.L. 119-21 §70202) has specific rules governing how much you can deduct. This page covers annual caps, income phaseouts, FICA treatment, and other key rules.
Annual Deduction Caps
The deduction is capped at a fixed dollar amount per year, varying by filing status. Source: IRS Newsroom.
| Filing Status | Annual Cap |
|---|---|
| Single | $12,500 |
| Head of Household | $12,500 |
| Married Filing Jointly | $25,000 |
| Married Filing Separately | Not Eligible |
If your overtime premium (0.5x × hourly rate × OT hours × weeks) exceeds the cap, the deduction is limited to the cap amount.
Income Phaseout Thresholds
The deduction phases out based on your modified adjusted gross income (MAGI). The phaseout rate is $100 reduction for every $1,000 of MAGI over the threshold. Source: IRS FAQ.
| Filing Status | Phaseout Begins | Deduction Eliminated |
|---|---|---|
| Single | $150,000 | $275,000 |
| Head of Household | $150,000 | $275,000 |
| Married Filing Jointly | $300,000 | $550,000 |
Formula: Phaseout amount = floor((MAGI − threshold) ÷ $1,000) × $100
If the phaseout amount ≥ your deduction (after cap), your deduction is $0.
FICA Taxes Still Apply
The overtime deduction does not reduce FICA taxes. You still owe:
- Social Security: 6.2% on wages up to $176,100 (2025). Source: IRS Publication 15, SSA.
- Medicare: 1.45% on all wages. Source: IRS Publication 15.
- Additional Medicare: 0.9% on wages over $200,000 (single/HoH) or $250,000 (MFJ). Source: IRS Publication 15.
| FICA Component | Rate | Wage Limit |
|---|---|---|
| Social Security | 6.2% | $176,100 (2025) |
| Medicare | 1.45% | No limit |
| Additional Medicare | 0.9% | Over $200K single/HoH, $250K MFJ |
MAGI: Modified Adjusted Gross Income
The phaseout is based on MAGI. For most W-2 workers, MAGI equals adjusted gross income (AGI) — your total income from Form 1040. MAGI includes all wages, overtime, tips, investment income, etc. When using the calculator, enter your total annual income including overtime.
State Taxes: Federal Only
The overtime deduction is a federal deduction only. It does not reduce your state income tax liability in any state. If you live in a state with income tax, your overtime pay remains fully taxable at the state level.
States with no income tax (e.g., Texas, Florida, Nevada, Washington, Wyoming, South Dakota, Alaska) have no state tax on any wages.
Frequently Asked Questions
What is the maximum overtime deduction?
$12,500 per year for single and head of household filers, $25,000 for married filing jointly. (IRS Newsroom)
At what income does the deduction phase out?
Phaseout starts at $150,000 MAGI for single/HoH and $300,000 for MFJ. It is fully eliminated at $275,000 (single/HoH) or $550,000 (MFJ). (IRS FAQ)
Does the deduction reduce Social Security and Medicare taxes?
No. The deduction only reduces federal income tax. FICA taxes (Social Security 6.2% and Medicare 1.45%) still apply to all overtime pay.
What is MAGI for the overtime deduction?
Modified adjusted gross income. For most W-2 employees, MAGI equals AGI — your total income from all sources, including overtime.
Does the overtime deduction reduce state taxes?
No. It is a federal deduction only. State income taxes are not affected.