OBBBA: No Tax On Overtime? Not Really, But We’ll Take It!

Overtime income was fully taxable for federal income tax purposes before the enactment of the One Big Beautiful Bill Act (OBBBA).

From 2025 to 2028, the OBBBA establishes a new temporary deduction that can offset up to $12,500 of qualified overtime income each year, or $25,000 of you are a married joint-filer.

Here is what you need to know.

Overtime Deduction Basics

The new overtime deduction can be claimed whether you itemize of not.

The deduction is intended to fulfill President Trump’s campaign promise of “no tax on overtime.”

While the new deduction doesn’t actually do this, it’s still good news if you have significant overtime income and you qualify for the write-off-which you probably will.

Unfortunately, this deduction is not a so called above-the-line deduction that reduces your adjusted gross income (AGI). Lower AGI is a good thing because it can make you eligible for more federal income tax breaks.

It’s important to understand that the new overtime write-off is a federal income tax deduction as opposed to an income exclusion. Therefore, federal payroll taxes will still apply to your overtime income, including amounts that are offset by the overtime deduction for federal income tax purposes. And your overtime income may still be fully taxable for state and local income tax purposes.

For a married person, joint return should be filed to claim the new overtime deduction.

What is Qualified Overtime Income?

For purpose of the new deduction, qualified overtime compensation is defined as overtime compensation paid to you by your employer as required by Section 7 of the Fair Labor Standards Act of 1938 that’s in excess of your regular rate. If you earn time-and-a half for overtime, the extra half constitutes qualified overtime income.

Qualified overtime income does not include any qualified tip income that’s eligible for the new deduction for tip payments.

Phase-out Rule

The overtime deduction that would otherwise be allowed (after applying the $12,500/$25,000 limit) starts to be phased out when your modified adjusted gross income (MAGI) exceeds $150,000 or $300,000 if you are a married joint-filer. The deduction is phased out by $100 for each $1,000 of MAGI or fraction thereof in excess of the applicable phase-out threshold.

So, if you are unmarried individual, phase-out is complete when MAGI exceeds $275,000. If you are a married joint-filer, phase-out is complete when MAGI exceeds $550,000.

For this purpose, MAGI means your regular AGI from Form 1040 plus certain tax-free offshore income that you probably don’t have.

Observation: With the generous phase-out threshold, relatively few overtime earners will be affected by the phase-out rule.

Social Security Number is Required

You cannot claim the new income deduction unless you include your Social Security number on the Form 1040 on which you claim the deduction.

For this purpose, the term “Social Security Number” means a Social Security number issued to you by the U.S. Social Security Administration. Also, you generally must be a U.S citizen, and you must have the number in hand before the Form 1040 filing deadline on which you claim the deduction.

Reporting Requirements

The amount of qualified overtime income for which you claim a deduction must be reported on a Form W-2 or other specific statement furnished by your employer to you and the IRS.

The OBBBA directs the IRS to issue guidance on the new deduction. It also directs the IRS to provide transition relief to taxpayers who claim the deduction and to employers and payors who are subject to new tax reporting requirements as a result of the overtime deduction.

Overtime for Corporate Owners is Not a Strategy

If you own at least 20 percent of a C or S corporation and actively help run it, you are an employee exempt from overtime pay under the Fair Labor Standards Act.

Thus, you can’t pay yourself overtime and benefit from the overtime rule.

BergerCPAFirst, with over 30+ years of experience, offers comprehensive tax preparation services for individuals and businesses nationwide. Our commitment is to provide personalized attention while ensuring compliance and maximizing tax benefits. If you have any questions or would like to schedule a consultation, please call (201) 587-9200 or send us an inquiry.