Work Overtime? Get a Tax Break. Earn Overtime? Keep More of It.

Do you put in extra hours at work to earn overtime? If your answer is yes, there's fantastic news from the tax world. A new law is now in effect that can put a significant dent in your federal income tax bill.

The One Big Beautiful Bill Act (OBBBA) introduces a temporary but powerful deduction specifically for your hard-earned overtime pay. Let's break down how it works and how you can benefit.

The Headline: A New Deduction for Overtime Earners

Before 2025, every single dollar of your overtime pay was taxed as ordinary income. The new OBBBA changes the game.

For the 2025 through 2028 tax years, you can now deduct a portion of your qualified overtime income right off the top:

• Single Filers: Up to $12,500 per year

• Married Filing Jointly: Up to $25,000 per year

The best part? You can claim this deduction even if you take the standard deduction. You don't need to itemize to get this benefit.

What Exactly is "Qualified Overtime Income"?

It’s crucial to understand what counts. This deduction applies only to the extra amount you are paid for working overtime hours, as defined by the Fair Labor Standards Act.

• Example: If your regular pay is $25/hour, your overtime rate is time-and-a-half, or $37.50/hour. The qualified portion is the extra $12.50 you earn for each overtime hour—not your entire overtime paycheck.

Important Caveats:

• This deduction does not reduce your Adjusted Gross Income (AGI). This means it won't affect deductions or credits that are based on your AGI.

• It does not exempt your overtime pay from Social Security, Medicare, or (in most cases) state and local taxes. It only reduces your federal income tax.

Are There Income Limits? (Phase-Out Rules)

Like many tax benefits, this deduction phases out for higher-income earners. However, the thresholds are set high enough that most people who earn overtime will still qualify for the full amount.

The deduction begins to phase out when your Modified Adjusted Gross Income (MAGI) exceeds:

• $150,000 for Single Filers

• $300,000 for Married Joint-Filers

For every $1,000 your income is above these thresholds, your deduction is reduced by $100. The deduction phases out completely at:

• $275,000 for Single Filers

• $550,000 for Married Joint-Filers

Key Requirements and Restrictions

Before you start planning, make sure you meet these criteria:

1. Filing Status: Married couples must file jointly to claim the full $25,000 deduction.

2. Social Security Number: You must have a valid SSN listed on your return.

3. Proper Reporting: Your employer must correctly report your qualified overtime income on your W-2 form (or another IRS-approved statement).

4. Not for Business Owners: If you own a business, you cannot pay yourself "overtime" to claim this deduction. The law specifically excludes owners who actively manage their corporations.

The Bottom Line

If you work overtime, this is a welcome tax break designed to reward your hard work. While it has some limitations, it offers a straightforward way for millions of Americans to lower their tax bill for the next four years.

As with any tax law, the details matter. If you have questions about how the OBBBA overtime deduction applies to your specific situation, it's always best to consult with a tax professional.