There’s a new federal tax deduction for overtime pay, and a lot of federal employees are asking whether it applies to them. The short answer: it depends on how your overtime is paid, and many feds who work overtime won’t qualify.
Here’s what the deduction covers, who qualifies, and what to check before tax season.
What the deduction is
The 2025 budget law created a tax deduction for “qualified overtime compensation” for tax years 2025 through 2028. Two things to know right away:
- You claim it on your tax return. It isn’t a payroll change, so your paycheck won’t look any different.
- Only the premium part counts. It covers the extra “half” in time-and-a-half, not your whole overtime paycheck.
Here’s how that works (an illustration):
| Per hour | |
|---|---|
| Base hourly rate | $40 |
| Overtime rate (time-and-a-half) | $60 |
| Deductible part | $20 |
How much you can deduct
| Single | Married filing jointly | |
|---|---|---|
| Maximum deduction per year | $12,500 | $25,000 |
| Starts phasing out above (MAGI) | $150,000 | $300,000 |
Above those income levels, the deduction is reduced by $100 for every $1,000 of income over the limit.
The federal catch: your FLSA status
The deduction applies to overtime required by the Fair Labor Standards Act (FLSA). For federal employees, that’s the key question:
| Your FLSA status | Does your overtime qualify? |
|---|---|
| Non-exempt | FLSA-required overtime generally qualifies |
| Exempt | Overtime paid under Title 5 likely doesn’t qualify |
How to check: your FLSA category is listed on your SF-50.
What doesn’t count
- Comp time. Only overtime paid as money qualifies. Overtime taken as time off doesn’t.
- Overtime premium above what the FLSA requires. Only the FLSA-required premium counts.
How to claim it
- Now: check your SF-50 to see whether you’re FLSA exempt or non-exempt.
- January: check your W-2. It should report your qualified overtime. Keep your leave and earnings statements too.
- Tax time: claim the deduction on your tax return.
The bottom line
The new overtime deduction can be worth up to $12,500 a year, but for federal employees it mostly comes down to one question: are you FLSA non-exempt? Check your SF-50 before tax season, and talk to your tax professional about your own situation.
Are you a federal employee within 12 months of retirement, or already retired, with $1 million+ invested? Book a free 15-minute Fit Call. You can also download our free Federal Retirement Roadmap.
Educational only, not tax, investment, or legal advice. Please consult your own tax, legal and financial advisors for personalized advice. Haws Federal Advisors | HawsFederalAdvisors.com