OBBBA’s Overtime Deduction: A New Way to Save on Taxes
The One Big Beautiful Bill Act (OBBBA) introduces something new for employees who regularly work overtime. From 2025 through 2028, you can claim a temporary deduction of up to $12,500 per year of qualified overtime pay—or $25,000 if you’re married filing jointly.
It’s not truly “tax-free overtime,” but it’s still a valuable way to cut your tax bill.
How the Overtime Deduction Works
- You can claim it whether or not you itemize deductions.
- It lowers your federal income tax, but not your payroll taxes (Social Security and Medicare still apply).
- State and local taxes may still apply to your overtime income.
- If you’re married, you must file jointly to use the full deduction.
Important: This is a deduction, not an exclusion. That means your adjusted gross income (AGI) does not go down, which could matter for other tax benefits tied to AGI.
What Counts as Qualified Overtime Income?
Qualified overtime income is the extra pay you earn above your regular rate under federal overtime rules (the Fair Labor Standards Act).
Example: If you earn $20/hour normally, and $30/hour for overtime, only the extra $10/hour is “qualified overtime income.”
Not included: tips (they have a separate deduction under OBBBA).
Income Limits (Phase-Out Rules)
The deduction begins to phase out once your income passes these levels:
- $150,000 for single filers
- $300,000 for married joint-filers
For every $1,000 you earn above those thresholds, the deduction drops by $100. By the time singles hit $275,000—or couples hit $550,000—the deduction is completely phased out.
Good news: These thresholds are high enough that most overtime earners won’t be affected.
What You’ll Need to Claim the Deduction
- Your Social Security number must be listed on your tax return.
- Your employer must report your qualified overtime income on your W-2 or other IRS-approved statement.
- The IRS is expected to issue detailed reporting guidance soon.
Who Can’t Use This Deduction
If you own 20% or more of a corporation (C or S corp) and actively manage the business, you’re exempt from overtime rules. That means you can’t pay yourself “overtime” to take advantage of this deduction.
Bottom Line
The OBBBA doesn’t completely remove taxes from overtime pay, but it does give workers a new deduction worth up to $12,500 (or $25,000 for couples).
- Payroll and state taxes still apply
- Federal income taxes can be reduced
- Most regular overtime earners will benefit
Takeaway: If you put in extra hours, this temporary provision (2025–2028) could put real money back in your pocket. Call us for more info.