When Does No Tax on Overtime Start?
When Does the Overtime Deduction Take Effect?
The No Tax on Overtime deduction was signed into law on July 4, 2025, as part of the One Big Beautiful Bill Act (P.L. 119-21). It is effective for tax years 2025 through 2028.
The deduction covers the overtime premium — the extra 0.5x above your regular hourly rate — for FLSA §7 covered employees. It is an above-the-line deduction claimed on Schedule 1, meaning you do not need to itemize to claim it.
Signed Into Law: July 4, 2025
President signed the One Big Beautiful Bill Act on July 4, 2025. The law creates IRC §225, a new above-the-line deduction for qualified overtime compensation. It covers the overtime premium (0.5x hourly rate) for FLSA §7 covered employees.
The deduction applies to taxable years beginning after December 31, 2024, and before January 1, 2029 — meaning tax years 2025, 2026, 2027, and 2028.
2025: The Transition Year
Because the law was signed mid-year (July 4, 2025), the entire 2025 tax year is covered — including overtime earned January through June 2025, before the law was signed. The IRS issued Notice 2025-62 providing guidance for the 2025 transition year.
For 2025, workers can claim the deduction for all qualifying overtime earned during the full tax year. However, employers were not required to track overtime premiums separately on W-2s for 2025. Workers may need to calculate their qualifying overtime from pay stubs or employer records.
2026 and Beyond: W-2 Box 12 Code TT
Starting with tax year 2026, employers report qualified overtime compensation on Form W-2 using Box 12, Code TT. This makes claiming the deduction straightforward — the qualifying amount appears directly on your W-2.
Simply look for Code TT in Box 12 when you receive your W-2. That amount is your qualified overtime compensation eligible for the deduction, subject to the annual cap and income phaseout limits.
Deduction Sunset: After 2028
The overtime deduction is temporary. It expires after the 2028 tax year (for taxable years beginning before January 1, 2029). After 2028, overtime pay will be fully taxable again unless Congress extends or renews the provision.
| Tax Year | Status |
|---|---|
| 2025 | Transition year — full year covered, IRS Notice 2025-62 guidance |
| 2026 | Full year — W-2 Box 12 Code TT reporting |
| 2027 | Full year — W-2 Box 12 Code TT reporting |
| 2028 | Final year — deduction expires after this year |
| 2029+ | Deduction no longer available (unless renewed) |
Frequently Asked Questions
Is overtime earned before July 4, 2025 covered?
Yes. The deduction applies to the full 2025 tax year, including overtime earned before the law was signed. IRS Notice 2025-62 provides transition guidance.
How do I claim the deduction for 2025?
For 2025, you may need to calculate your qualifying overtime from pay stubs since employers were not yet required to use W-2 Code TT. Claim the deduction on Schedule 1.
What is W-2 Box 12 Code TT?
Starting in 2026, employers report qualified overtime compensation using Code TT in Box 12 of your W-2. This is the amount eligible for the overtime deduction.
Does the deduction expire?
Yes. It is effective for tax years 2025 through 2028 only. After 2028, overtime pay will be fully taxable unless Congress extends the provision.
Can I amend previous tax returns?
No. The deduction only applies to tax years 2025-2028. It cannot be applied to prior years.