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It happened. After a year of "will they or won't they" speculation and endless campaign rallies, the rules for your 2025 and 2026 paychecks have officially shifted. If you’ve been scrolling through news feeds wondering if Donald Trump actually removed the tax on overtime, the short answer is: mostly, but with some massive "fine print" that could trip you up if you aren't careful.
Basically, the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, changed the game for millions of blue-collar workers and hourly employees. But don't go spending that "tax-free" money just yet. It isn't as simple as a 0% tax rate on every extra hour you work.
The Reality of No Tax on Overtime in 2026
First off, let's get the big milestone out of the way. President Trump signed the legislation last summer, and it retroactively covered all of 2025. That means right now—as you prepare to file your taxes in early 2026—you might be eligible for a significant refund or a lower tax bill.
But here is the kicker. It isn't a total "removal" of taxes. It’s actually a federal income tax deduction.
When people hear "no tax," they think their paycheck will look exactly the same as if the IRS didn't exist for those hours. Honestly, that’s not quite how the OBBBA works. You still have to pay Social Security and Medicare taxes (the payroll taxes) on every cent of that overtime. The "break" only applies to the federal income tax portion.
How the Deduction Actually Hits Your Wallet
The law targets what the IRS calls "qualified overtime compensation." This is specifically the "half" in "time-and-a-half."
If your regular rate is $20 an hour, your overtime rate is $30. Under this new law, you don't get a tax break on the full $30. You get it on the extra $10—the premium you earned for working more than 40 hours a week.
- The Cap: You can deduct up to $12,500 of this premium pay if you're single.
- Joint Filers: If you’re married and filing together, that cap jumps to $25,000.
- The Phase-out: If you’re making serious bank, the benefit starts to vanish. Once your Modified Adjusted Gross Income (MAGI) hits $150,000 (or $300,000 for couples), the deduction starts shrinking.
It’s a "below-the-line" deduction. This means you can claim it even if you take the standard deduction, which is how most of us file anyway.
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Why 2026 Is Different for Your W-2
If you looked at your 2025 W-2 and didn't see a special box for overtime, don't panic. The IRS gave employers a "grace period" for the 2025 tax year because the law was passed so late in the season.
However, for the 2026 tax year, the IRS is getting strict.
Employers are now required to use Box 12 on your W-2 with a specific code (currently drafted as "TT") to report exactly how much "qualified overtime" you earned. This makes it much easier for the government to track—and for you to claim—the deduction without having to dig through a mountain of old pay stubs.
Who Gets Left Out?
Not everyone is invited to the party. This law is strictly tied to the Fair Labor Standards Act (FLSA).
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If you're a "salaried exempt" employee—meaning you're a manager or professional who doesn't get paid extra when you stay late—this law does precisely nothing for you. You don't have "qualified overtime" because you aren't legally required to be paid a premium rate for those extra hours.
Also, if you live in a state with its own income tax, like California or New York, you might still owe state taxes on that overtime. While some states (like Wisconsin) have rushed to match the federal "no tax" rules, others haven't. You could end up in a situation where the feds don't tax your OT, but your governor still wants a cut.
The Strategy for Workers Right Now
So, what should you actually do?
First, check your pay stubs from 2025. Since 2025 was a transition year, your employer might not have reported the overtime premium separately on your W-2. You may need to use Schedule 1-A to manually calculate your deduction when you file this spring.
Second, if you're an employer, make sure your payroll software is updated for 2026. The IRS has warned that failing to separate overtime pay on W-2s this year could lead to penalties ranging from $60 to nearly $700 per form.
This policy is currently set to expire at the end of 2028. It’s a "sunset" provision, much like the original 2017 tax cuts. Whether it stays permanent depends entirely on what happens in the next election cycle. For now, the best move is to document every extra hour you work. That "time-and-a-half" is worth a lot more than it used to be.
Actionable Next Steps
- Audit your 2025 stubs: Manually total the "extra half" of your overtime pay to see if you can claim the 2025 deduction on your current return.
- Check your W-4: Talk to your HR department to see if they’ve adjusted your federal withholding to account for the overtime deduction; you might be overpaying each month.
- Verify State Laws: Look up whether your specific state has passed a "conformity" bill to exempt overtime from state income tax as well.
- Consult Schedule 1-A: Download the new IRS forms for 2026 to familiarize yourself with how the "Qualified Overtime Compensation" is actually subtracted from your income.