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☕ DrinkCoffeeAndProfit
Smart money moves before breakfast
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Inspiration Quote for the Day
“The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.”
— Jean-Baptiste Colbert, finance minister to Louis XIV
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The Morning Ritual
The IRS Just Explained “No Tax on Overtime.” Two Thirds of Your Overtime Is Not Covered.
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A guy I know runs a loading crew on second shift. In July he picked up `14` overtime hours the week of the Fourth. He came out of the break room waving the stub. Folded twice, soft at the creases from riding in his shirt pocket all day. Overtime is tax free now, he said. Heard it on the radio.
The IRS put out updated guidance yesterday morning. He is right that a break exists. He is wrong about roughly two thirds of it. And the part he has wrong is the part that shows up on his return.
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In One Sip
► The IRS updated its guidance on the overtime deduction yesterday. It comes from the tax law signed in July 2025 and runs for tax years 2025 through 2028.
► It is a deduction, not an exemption. Capped at `$12,500` filing single and `$25,000` filing jointly. It starts phasing out at `$150,000` of income single, `$300,000` joint.
► Only the premium counts. That is the extra half of time and a half. The IRS example: regular rate `$40`, overtime rate `$60`, and only the `$20` difference qualifies. One third of the overtime payment.
► More than `29` million taxpayers claimed it for 2025. The average claim was over `$3,100`, according to Treasury.
► Here is the new part almost nobody has read. For tax year 2026 your employer must print the eligible amount on your W-2, in box `12`, under the code `TT`. First year that reporting is mandatory. Tax experts already say to check it against your pay stubs. If that box comes out wrong, you eat the difference.
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Why It Matters for Your Money
Use the IRS numbers. Regular rate `$40`, overtime rate `$60`, ten hours on the clock. You get paid `$600`. The deductible piece is `$200`. At a `22%` bracket that knocks about `$44` off your tax bill. On a `$600` check, that is `7.3%`, not `100%`.
Work backward from Treasury’s average and it gets clearer. A `$3,100` average deduction means the average claimant earned roughly `$9,300` in overtime. At `22%` that is about `$682` back at filing time.
Now the line nobody prints. Social Security and Medicare still take `7.65%` of the whole overtime amount. On `$9,300` that is about `$711`. The payroll tax on your overtime is larger than the income tax this break saves you.
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The Wealth Angle
Let me be fair before I am skeptical. That payroll tax was always owed, and this deduction is new money that did not exist two years ago. `$682` is real. Claim it. My complaint is not the law, it is the label. Four words on a bumper sticker describe a capped, phased-out, premium-only deduction that expires in 2028. Colbert would have recognized the craftsmanship.
The genuinely useful thing in yesterday’s update is box `12`, code `TT`. Think about what that asks of a payroll department. Isolate the half-premium on every overtime hour for every hourly worker, all year, and print one clean number. In the first year the rule applies.
First-year reporting is where errors live. If that box comes out low, you quietly lose a deduction you already earned. Nobody at the IRS will catch that on your behalf. Three more of these ride along in the same law. Interest on a car loan. Tip income. An extra deduction once you turn `65`. Same window, all gone after 2028.
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☕ Key Insight:
Time and a half is three halves. The deduction covers one of them. That is not a scandal, it is arithmetic, but it is not what the bumper sticker says.
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Coffee Break Move
If you work overtime: Pull your last three pay stubs and add up the overtime hours. Take your regular hourly rate, cut it in half, multiply by those hours. That is your premium. That is the number the deduction is built on. Write it on an index card and stick it in your tax folder. In January, compare it to box `12`, code `TT`. If the two do not match, ask payroll before you file, not after.
If you do not work overtime: Check the other three anyway. Did you finance a car? That interest may be deductible now. Do you or your spouse earn tips? Same law. Did either of you turn `65`? There is an extra deduction waiting. Nobody mails a reminder for any of them.
My friend still has that stub in his shirt pocket. He will get something back and he earned every hour of it. He will just get about a third of what the radio promised. Go find your own number before the coffee gets cold.
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