By Mudassir Khan
The overtime deduction is not all or nothing at higher incomes, it shrinks gradually. Here is exactly how the MAGI phase out works, with the math and three worked examples.
Rules verified November 2026 · Sources: IRS, U.S. Department of Labor
The overtime deduction shrinks once your modified adjusted gross income tops $150,000 single or head of household, or $300,000 joint. Each full $1,000 over costs $100 of deduction, so at the maximum deduction it reaches zero at $275,000 single or $550,000 joint. Your actual deduction is the smaller of your qualified premium and the reduced cap.
The deduction is reduced once your modified adjusted gross income (MAGI) crosses a threshold:
In plain terms: take your MAGI, subtract the threshold, divide by 1,000, round down, and multiply by 100. That is the amount subtracted from your deduction. A single filer at $160,000 MAGI is $10,000 over, so the deduction drops by $1,000. A single filer at $160,999 is also treated as $10,000 over, because the steps are per full $1,000.
If you have at least the full cap in qualified premium, the phase out ends the deduction at:
If your qualified premium is below the cap, the deduction hits zero at a lower income. A single filer with only $5,000 of qualified premium loses it entirely at $200,000 MAGI ($50,000 over × $100 per $1,000 = $5,000 reduction). The phase out always applies to your actual deduction amount, which is the smaller of your premium and the cap, minus the reduction.
Example 1: single, just into the phase out. Single filer, $9,000 of qualified overtime premium, MAGI $160,000. Under the $12,500 cap: $9,000. Phase out: MAGI is $10,000 over the $150,000 threshold, so the deduction drops by $1,000. Deduction = $9,000 minus $1,000 = $8,000. At the 22% bracket, tax saved = $8,000 × 22% = $1,760.
Example 2: joint filers, deep into the phase out. Married filing jointly, $30,000 of qualified overtime premium, MAGI $400,000. After the $25,000 joint cap: $25,000. Phase out: MAGI is $100,000 over the $300,000 threshold, so the deduction drops by $10,000. Deduction = $25,000 minus $10,000 = $15,000. At the 24% bracket, tax saved = $15,000 × 24% = $3,600.
Example 3: single, near the top of the phase out. Single filer, $14,000 of qualified overtime premium, MAGI $270,000. After the $12,500 cap: $12,500. Phase out: MAGI is $120,000 over the $150,000 threshold, so the deduction drops by $12,000. Deduction = $12,500 minus $12,000 = $500. At the 32% bracket, tax saved = $500 × 32% = $160.
The joint thresholds are exactly double the single thresholds, $300,000 vs $150,000, and the joint cap is exactly double, $25,000 vs $12,500. That means a married couple's phase out behaves like two single filers stacked together: the deduction survives to $550,000 joint instead of $275,000 single. But note the cap is per tax return, not per spouse. If only one spouse earns overtime, the couple still gets only one $25,000 cap, and both spouses' incomes count toward the $300,000 MAGI threshold.
Phase out rules on this page follow IRS guidance on the Working Families Tax Cuts provisions and IRS Fact Sheet FS-2026-13 (August 2026). The overtime itself must qualify under U.S. Department of Labor FLSA rules.
Above $150,000 MAGI ($300,000 joint), the deduction drops by $100 for every $1,000 you are over the threshold, in full $1,000 steps.
At the maximum deduction: $275,000 MAGI single or head of household, $550,000 joint. With a smaller premium, it reaches zero at a lower income.
Your deduction is the smaller of your qualified premium and the cap, minus the phase out reduction. The reduction comes off your actual deduction amount.
Your modified adjusted gross income, which includes your overtime pay. Heavy overtime years can push you toward the threshold faster than expected.
No. Married filing separately is excluded entirely, at any income level.
Only in states that follow the federal deduction. In most states the federal deduction never reaches the state return.
Run your own numbers with the deduction calculator, which applies the cap and phase out automatically. For the reporting side, see W-2 Box 12 code TT explained.