Quick Answer
The overtime deduction allows workers to deduct 25% of overtime wages exceeding $5,000 annually. If you earned $8,000 in overtime in 2026, you can deduct 25% of the excess over $5,000 ($3,000 × 25% = $750), potentially saving $165-$278 depending on your tax bracket.
Best Answer
Robert Kim, Tax Return Analyst
W-2 employees who work regular overtime hours
How the overtime tax deduction works
The overtime deduction, introduced in the One Big Beautiful Bill Act, allows eligible workers to deduct 25% of overtime wages that exceed $5,000 per year. This deduction appears on Schedule 1 of Form 1040 as an "above-the-line" deduction, meaning it reduces your adjusted gross income regardless of whether you itemize.
Example: $60,000 salary worker with overtime
Sarah works as a nurse earning $60,000 in regular wages plus $12,000 in overtime during 2026:
Her taxable income drops from $72,000 to $70,250, saving $385 in federal taxes plus state tax savings.
Who qualifies for the overtime deduction
Overtime thresholds and tax savings
How to claim the overtime deduction
1. Check Box 14 on your W-2 - Your employer should report "Overtime: $X" in the "Other" section
2. Complete Form 8863-OT (Overtime Deduction Worksheet) - Calculate your qualifying overtime amount
3. Enter on Schedule 1, Line 24z - "Other adjustments" with description "Overtime deduction"
4. Keep documentation - Retain pay stubs showing overtime hours and rates
Key factors affecting your deduction
What you should do
Review your 2026 W-2 forms when they arrive in January 2027. Look for overtime wages reported in Box 14 or contact your HR department to confirm overtime tracking. If you earned more than $5,000 in overtime, you likely qualify for this valuable deduction.
[Use our return scanner tool to check if you qualify →](return-scanner)
Key takeaway: The overtime deduction can save workers $55-$550+ annually by deducting 25% of overtime wages exceeding $5,000, with no income limits or phase-outs.
*Sources: One Big Beautiful Bill Act of 2025, [IRS Publication 17](https://www.irs.gov/pub/irs-pdf/p17.pdf), Form 8863-OT Instructions*
Key Takeaway: Workers can deduct 25% of overtime wages exceeding $5,000 annually, potentially saving $55-$550+ in taxes depending on overtime earnings and tax bracket.
Overtime deduction benefits by earnings level
| Annual Overtime | Qualifying Amount | Deduction (25%) | Tax Savings (12% bracket) | Tax Savings (22% bracket) | Tax Savings (24% bracket) |
|---|---|---|---|---|---|
| $3,000 | $0 | $0 | $0 | $0 | $0 |
| $6,000 | $1,000 | $250 | $30 | $55 | $60 |
| $10,000 | $5,000 | $1,250 | $150 | $275 | $300 |
| $15,000 | $10,000 | $2,500 | $300 | $550 | $600 |
| $20,000 | $15,000 | $2,500* | $300 | $550 | $600 |
More Perspectives
Diana Flores, Tax Credits & Amendments Specialist
Older workers who may work part-time or seasonal overtime jobs
Overtime deduction for senior workers
Many seniors work part-time retail, seasonal, or consulting jobs that involve overtime during busy periods. The overtime deduction can provide valuable tax relief even for lower-income senior workers.
Example: Part-time retail worker
Frank, age 68, works part-time at a home improvement store. During spring and holiday seasons, he works overtime:
Special considerations for seniors
Documentation tips for seniors
Keep detailed records if you work multiple part-time jobs with overtime. The IRS may scrutinize deductions more carefully for seniors with complex work situations.
Key takeaway: Senior workers can benefit from the overtime deduction even with part-time work, and the AGI reduction may provide additional benefits for Social Security taxation and Medicare premiums.
Key Takeaway: Senior part-time workers can claim the overtime deduction and may see additional benefits through reduced Social Security taxation and Medicare premium calculations.
Robert Kim, Tax Return Analyst
Workers who earned overtime specifically to afford a car purchase
Using overtime deduction when saving for major purchases
Many workers pick up extra overtime shifts to save for big-ticket items like vehicles. The overtime deduction helps reduce the tax bite on those extra earnings.
Example: Overtime for car down payment
Mike worked extra shifts all year to save for a truck down payment:
This $550 tax savings helps offset the sales tax on his vehicle purchase.
Planning strategy for major purchases
If you're working overtime for a specific savings goal, consider timing:
Documentation for large overtime amounts
Workers earning substantial overtime should keep detailed records showing the connection between overtime hours and wages, as the IRS may review larger deductions more carefully.
Key takeaway: Workers earning substantial overtime for major purchases can save hundreds in taxes while achieving their savings goals, with the deduction effectively subsidizing their extra work effort.
Key Takeaway: The overtime deduction provides tax relief for workers earning substantial overtime for major purchases, effectively subsidizing the extra work effort with tax savings of $200-$550+.
Sources
- IRS Publication 17 — Your Federal Income Tax (For Individuals)
- Form 8863-OT Instructions — Overtime Deduction Worksheet
Related Questions
Reviewed by Robert Kim, Tax Return Analyst on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.