Do you regularly earn overtime pay? If so, the One Big Beautiful Bill Act may help lower your federal income tax bill.
New Overtime Deduction
Before 2025, the IRS taxed every dollar of your overtime pay as ordinary income. Beginning this year (2025) and continuing through 2028, the OBBBA allows a new temporary deduction for qualified overtime income:
- Up to $12,500 each year for single filers
- Up to $25,000 each year for married joint-filers
This deduction applies whether or not you itemize deductions.
What Counts as Qualified Overtime Income
Qualified overtime income includes only the extra pay you earn for overtime hours—generally, the portion above your regular hourly rate under the Fair Labor Standards Act. For example, if your regular rate is $25 per hour and you receive $37.50 for overtime, the extra $12.50 per hour counts as qualified overtime income.
Important: This deduction does not reduce your adjusted gross income (AGI). It also does not exempt your overtime pay from payroll taxes or, in many cases, state and local taxes.
Income Phaseouts
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
The deduction decreases by $100 for every $1,000 of income above these thresholds. Phaseout ends at $275,000 for single filers and $550,000 for joint filers.
Because these thresholds are high, most overtime earners will qualify for the full deduction.
Key Restrictions and Requirements
- You must file jointly to claim the $25,000 married joint-filer deduction.
- You must include your valid Social Security number on your tax return.
- Your employer must report your qualified overtime income on your W-2 or another IRS-specified statement.
- Business owners cannot pay themselves “overtime” to claim the deduction, since overtime law excludes owners who actively manage their corporations.
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