Looking for a larger tax refund this year? Certain workers might qualify for a new deduction.

New Overtime Deductions Could Boost Tax Refunds

Tax professionals are encouraging filers to familiarize themselves with a recent law that might lead to higher refunds. The upcoming tax deadline is April 15, 2026.

As taxpayers gear up for the April 15 filing date, they should be aware of a significant new deferral impacting many hourly employees. This change means a part of overtime earnings will be eligible for a unique deduction.

This development comes from the “One big, beautiful bill,” which introduces a new excess deduction for overtime premiums. This is alongside existing exclusions for specific tip income and newly available deductions for seniors and other groups, as noted by tax experts.

According to this law, individuals can deduct up to $12,500 annually in qualified overtime pay, and married couples who file jointly can deduct up to $25,000. This could potentially lessen their taxable income, easing their overall tax obligations. This move reflects a broader initiative aimed at alleviating the federal income tax load on wage income, particularly overtime and tips, while simplifying tax matters for many salaried individuals.

However, it’s important to note that not all overtime pay is deductible. Only the premium portion qualifies. For example, if someone earns $20 an hour and works an hour and a half of overtime at $30 an hour, they would only be able to deduct $10 for each hour of overtime worked. The initial $20 per hour remains their standard taxable wage. This detail is crucial for workers hoping to maximize their new advantages without running into issues with the IRS later on.

Another hurdle is the necessity for proper documentation. Many W-2 forms do not clearly indicate overtime premiums, leaving taxpayers uncertain about their deductible amounts. In response, the IRS has introduced “transitional relief,” allowing filers to estimate their overtime premium based on year-end pay stubs or employer summaries. This measure aims to enable workers to claim deductions now while providing employers the opportunity to update their payroll systems.

Mark Steber, chief tax information officer at Jackson Hewitt Tax Office, emphasizes that staying organized is key. “This isn’t something that happens automatically or gets standardized for 2025. It’s wise to keep records, consult your tax advisor, and ensure accuracy on your return,” he stated.

He also pointed out that these regulations are so new that seeking professional advice is essential to ensure individuals receive their due benefits.

“It’s surprising how many people are unaware of this new deduction, including benefits for tips and seniors. There’s a lot of misunderstanding surrounding it because it’s unprecedented and complex,” he remarked.

On a national level, Steber noted that tax refunds have increased around 10% compared to the previous year, partly due to these fresh deductions. Despite ongoing reports about IRS staffing challenges, he mentioned that there haven’t been widespread delays in processing returns this season.

As the April 15 deadline approaches, tax experts advise workers relying on overtime deductions to gather their payroll documents, recognize that only the premium portions are deductible, and seek assistance in accurately claiming this new benefit.