Introduction: A Hidden Tax Opportunity for High-Income Earners and Professionals
If you’ve been putting in longer hours lately or earning bonuses tied to extra time worked, there’s good news in the latest IRS update for 2025.
The One Big Beautiful Bill (OBBB)—a sweeping federal tax reform signed in July 2025—introduced a new “qualified overtime compensation” deduction worth up to $12,500 for single filers or $25,000 for married joint filers between 2025 and 2028.
This new benefit is not just for blue-collar workers—it can also help high-net-worth professionals, executives, and consultants strategically reduce Adjusted Gross Income (AGI) and increase overall tax efficiency.
What Is the Qualified Overtime Deduction?
The deduction allows eligible taxpayers to claim up to $12,500 ($25,000 joint) of overtime or tip income earned between 2025–2028. It aims to reward extended work participation and compensate for post-pandemic labor shortages.
Legal Reference
Authorized under IRC Section 62(a)(22) by the One Big Beautiful Bill (OBBB), this is an above-the-line deduction—meaning it directly reduces AGI even if you don’t itemize deductions.
Who Qualifies?
1. Earn “Qualified Overtime” or Tip Income
To qualify, you must receive:
- Hourly pay beyond 40 hours per week, or
- Reportable tips through Form W-2 or Form 1099-NEC
Income must be shown in Box 1 of Form W-2 or equivalent 1099 statements.
2. Meet Income Thresholds
- Single filers: Deduction phases out between $150,000 and $225,000 AGI.
- Married filing jointly: Phases out between $300,000 and $450,000 AGI.
3. Active Tax Years
Applies for tax years 2025 through 2028 only.
Examples of How It Works
Example 1: Engineer with Overtime
Scenario: A project engineer earns $180,000 plus $15,000 overtime.
Result: Partial phase-out still allows about $7,500 deduction.
Tax Savings: ~$2,400 at a 32% marginal rate.
Example 2: Married Couple with Overtime
Scenario: One spouse earns $220,000 + $10,000 overtime; the other earns $180,000 + $8,000 overtime.
Combined AGI: $400,000 (within phase-out).
Result: Approx. 60% eligibility → $10,800 deduction.
Tax Savings: ~$3,780 at 35% bracket.
Example 3: Executive with Consulting Income
Scenario: Executive with $350K W-2 + $30K 1099 consulting.
If consulting hours exceed 40 weekly equivalents, the 1099 portion may qualify.
Tip: Maintain detailed logs to substantiate the overtime claim.
How to Claim the Deduction
1. Report on Schedule 1 (Form 1040)
Use the new line for “Qualified Overtime Compensation Deduction.” Enter the lesser of the actual overtime/tip income or $12,500 ($25,000 joint).
2. Keep Required Documentation
- Paystubs showing overtime hours
- Employer verification or payroll records
- Form 4070 for tip income
- Consulting logs for 1099 work
3. Watch for Future W-2 Code Updates
Employers may use Box 12, Code QO starting 2026 to identify qualifying pay.
Avoid These Common Mistakes
- Claiming bonuses as overtime (not allowed)
- Lack of records proving extra hours
- Crossing AGI phaseout thresholds unintentionally
- Improper employer reporting or classification
Pro Tip: Keep a running year-end summary of overtime hours and related pay to make audit defense easy.
Why It Matters for High-Net-Worth Individuals
Reducing AGI isn’t just about income tax—it affects Medicare IRMAA brackets, Net Investment Income Tax, and phaseout of other credits.
Conclusion: A Temporary Window for Permanent Efficiency
The Qualified Overtime Deduction (2025–2028) offers a rare above-the-line opportunity to lower your taxable income. For high earners and retirement-focused professionals, this can strengthen AGI management, improve cash flow, and unlock hidden savings.
Key Takeaways
- Deduct up to $12,500 (single) / $25,000 (joint) in overtime or tips
- Active only for 2025–2028
- Applies to both W-2 and 1099 income
- Helps manage Medicare IRMAA and tax brackets
Start tracking overtime now—with the right planning, this four-year window can yield permanent long-term financial benefits.
