US nurses pick up a lot of overtime, so the federal "no tax on overtime" deduction is one of the most relevant tax changes in years. The name is a little misleading, though. It isn't "no tax" on all your overtime pay. Here's how it actually works.
This deduction is US federal law only. Canadian nurses: overtime is taxed as regular income in Canada.
The basics
- Years: 2025 through 2028 tax years.
- What's deductible: only the premium portion of overtime that federal law (the Fair Labor Standards Act) requires. If you earn time and a half, that's the extra "half," not the whole overtime paycheque.
- Maximum: $12,500 per year for single filers, $25,000 for married couples filing jointly.
- Income limit: the deduction phases out when modified adjusted gross income is above $150,000 ($300,000 joint), shrinking by $100 for every $1,000 over.
- Who can claim it: you don't need to itemize; it's available whether you take the standard deduction or itemize.
A nurse example
You earn $40 an hour and work 200 FLSA overtime hours in the year at time and a half ($60 an hour).
- Total overtime pay: 200 × $60 = $12,000
- Premium portion (the extra half): 200 × $20 = $4,000
Your deduction would be $4,000, not $12,000. At a 22% federal bracket, that saves about $880 in federal income tax.
What probably doesn't count
- The base-rate part of overtime hours.
- Shift differentials (evening, night, weekend premiums) aren't overtime premiums.
- Overtime that only your union contract or employer policy requires, beyond what federal law requires. For example, double time or daily overtime that the FLSA doesn't mandate may not qualify.
Hospitals can use different overtime systems under the FLSA, so ask your payroll department which part of your overtime is FLSA-required. That's the part that matters here.
What it doesn't change
- Your overtime is still subject to Social Security and Medicare.
- State income tax may still apply. States decide whether to follow the federal rule.
- Your withholding on each paycheque may not change. The benefit usually shows up when you file your return.
How to claim it
- Keep every pay stub. For the 2025 tax year, many W-2s didn't show qualified overtime separately, so you may need to total it yourself.
- From the 2026 tax year, employers are expected to report qualified overtime on your W-2.
- Claim the deduction on your federal return (Schedule 1-A). Tax software will ask about it.
- If your situation is complicated (several employers, travel contracts, or income near the phase-out), consider a tax professional.
What to do with the savings
A bigger refund is a perfect chance to move forward: top up your emergency fund, pay down debt, or invest in your 403(b) or 457(b).
See how your overtime adds up: enter your overtime hours and multiplier in the free Nurse Shift Pay Calculator.
This article is for general education and isn't tax advice. Rules are based on the federal law and IRS guidance available as of October 2026 and may change; check IRS.gov or a tax professional for your situation.