No Tax On Overtime – On July 4, 2025, President Donald Trump signed the "One Big Beautiful Bill Act" (H.R. 1) into law, ushering in a significant change for American workers: a federal income tax deduction on qualified overtime pay.
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When Does No Tax On Overtime Start ?
Effective January 1, 2025, and set to expire December 31, 2028, this provision allows single filers to deduct up to $12,500 and joint filers up to $25,000 of overtime compensation, as defined by the Fair Labor Standards Act (FLSA).
While not a complete tax exemption, as payroll taxes like Social Security and Medicare still apply, the policy is being hailed as a financial lifeline for millions of hardworking Americans.
For workers in industries like manufacturing, healthcare, and retail, where overtime is common, the deduction promises real savings. Take Maria, a nurse in Ohio working 10 hours of overtime weekly at $40 per hour. Her annual overtime pay of $20,800 could see a federal tax savings of up to $4,576, depending on her income bracket.
This extra cash, realized when filing taxes in 2026, could cover childcare, student loans, or savings—priorities for many middle-class families. The policy’s focus on FLSA-defined overtime ensures only pay exceeding regular rates qualifies, targeting those who truly go the extra mile.
Supporters argue the deduction incentivizes hard work and boosts disposable income. The U.S. Chamber of Commerce estimates it could benefit 12 million workers, particularly those in blue-collar sectors.
No Tax On Overtime Bill Passed
House Speaker Mike Johnson called it “a win for the American dream,” emphasizing its role in rewarding effort without penalizing productivity. For small businesses, the policy could indirectly ease labor costs, as employees may be more willing to work overtime without the tax burden.
However, the deduction isn’t without flaws. Low-income workers, who often face minimal federal tax liability due to standard deductions, may see little benefit.
Critics, including Senate Democrats, argue the policy disproportionately favors higher earners in the 22% or 24% tax brackets, where the deduction’s impact is more pronounced.
Additionally, state and local taxes, which vary widely, aren’t affected, meaning workers in high-tax states like California may feel less relief. For instance, Alabama’s pilot program since October 2024 exempts overtime from state income tax, but most states haven’t followed suit.
Another concern is the policy’s interaction with overtime eligibility. The Trump administration’s reversal of a Biden-era rule expanding overtime protections means fewer workers may qualify for mandatory overtime pay, potentially limiting the deduction’s reach. Labor unions worry employers might exploit this by relying on overtime instead of hiring new staff, increasing workplace strain.
Despite these critiques, the deduction marks a bold step in tax reform. Workers like Maria are cautiously optimistic, hoping the extra savings will ease financial pressures. As the 2026 tax season approaches, the true impact will become clearer, but for now, the policy offers a rare bipartisan nod to America’s workforce.
