Overtime Tax Break Draws More Filers Than Expected

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Taxpayers have flocked to one of this year's new tax breaks, according to one government official.

Treasury Secretary Scott Bessent said earlier this week that a quarter of taxpayers have deducted their overtime pay so far. That number is more than double the previous estimates of how many taxpayers would claim the new deduction.

The "One Big, Beautiful Bill," passed by Congress in July, included several new tax cuts that have so far increased the average tax refund by almost 11%. One of these tax cuts includes the new 'no tax on overtime' deduction. It allows single taxpayers to deduct up to $12,500 of earned overtime wages from their taxable income, reducing their overall tax bill.

The IRS did not respond to questions about whether Bessent's comments matched its records. However, a quarter of tax filers claiming the overtime deduction is far above initial estimates of those eligible for the break.

Many taxpayers are relying on their boosted refund to pay down debt or to afford everyday and big purchases this year. That means higher refunds will increase consumer spending, boosting the country's GDP and preventing a recession.

A previous report from the Tax Policy Center, a think tank run by the Urban Institute and the Brookings Institution, estimated that only 8.8% of taxpayers would be eligible to claim the 'no tax on overtime' deduction. The Urban Institute told Investopedia it needed to wait until it received more evidence about the filing data to estimate the number of returns claiming the overtime deduction for the 2026 filing season.

While the vast majority of hourly workers and almost three in 10 salaried workers are eligible for overtime, only about 8.5% of all workers received overtime pay in 2023, according to a report from The Budget Lab at Yale.

Additionally, The Budget Lab previously estimated that 8% to 10% of tax returns would claim the overtime deduction, said John Ricco, associate director of policy analysis at The Budget Lab.

"We expected that nowhere near 25% of returns would be claiming this deduction, and so for us, this is a surprise," Ricco said. "[But] I do think that the 25% number is plausible."

Firstly, the Budget Lab's overtime worker numbers are estimates based on algorithms that use the data they have.

"There is no existing public administrative record that is public that says: here is exactly how many people are working Fair Labor Standards Act overtime," Ricco said.

In addition, The Budget Lab's estimate of 8% to 10% of tax returns that would claim the overtime deduction only includes the number of taxpayers who would see tax savings from the deduction. It does not include taxpayers who would already owe $0 in taxes or have received a refund.

Additionally, taxpayers may have increased or started working overtime after the "One Big, Beautiful Bill" passed to take advantage of the new deduction, Garrett Watson, director of policy analysis at the Tax Foundation, said in an email.

"Now that there's a tax advantage to working overtime, [workers may have] restructured the nature of their jobs so that more of the hours worked are going to qualify for this deduction," Ricco said. "It's possible that employers have sort of shifted schedules so that more people's aggregate payroll is going as overtime."

Since the overtime deduction was introduced halfway through 2025, the IRS gave employers some leniency. For the 2026 tax filing season, employers are not required to provide the exact overtime amount to their workers, meaning workers will have to calculate and report their overtime wages themselves.

"[Waiving this requirement] may elevate improper deduction claims," Watson said. "[Without] audit or other data, we can’t know how much this could be driving the numbers yet."

Lastly, the percentage of tax returns that claim the overtime deduction may be lower once the IRS receives all 2025 tax returns.

"It might be possible that people who expect to get money back, or to have lower tax returns, and want the refund earlier, those are the ones who actually benefit from these [new] deductions," Ricco said. "It wouldn't surprise me if the number ends up at, say, 20% instead of 25 once dust settles."

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