No Tax On Overtime – The "One Big Beautiful Bill Act," signed into law on July 4, 2025, introduced a federal income tax deduction on overtime pay, a move touted as a victory for America’s middle class.
Starting January 1, 2025, workers can deduct up to $12,500 (single) or $25,000 (joint) of FLSA-qualified overtime pay from their federal taxable income, with the provision expiring in 2028.
While the policy promises fatter tax refunds for some, its benefits are uneven, raising questions about who truly wins.
For middle-income workers, the deduction is a tangible boost. Consider John, a factory worker in Michigan earning $50,000 annually, with $10,000 in overtime pay.
In the 22% tax bracket, his deduction could save him $2,200 when filing taxes. This windfall could fund a family vacation or car repairs—real relief for households stretched thin.
The Tax Foundation projects 8 million workers in similar brackets will benefit most, as their tax liability aligns with the deduction’s caps.
Yet, the policy’s design limits its reach. Low-income workers, like retail clerks earning $30,000, often owe little federal income tax after standard deductions, rendering the overtime break negligible.
High earners, especially those above $150,000, face phase-out limits, reducing their benefit. Payroll taxes (7.65% for Social Security and Medicare) remain, and state taxes, which can exceed 7% in states like New York, further dilute savings.
Alabama’s state-level overtime tax exemption shows what’s possible, but without broader state adoption, the federal deduction’s impact varies geographically.
Critics also highlight structural issues. The deduction only applies to FLSA-mandated overtime, excluding premiums from union contracts or state laws.
The recent rollback of Biden’s overtime eligibility expansion, which would have extended overtime pay to 4 million more workers, further narrows the pool of beneficiaries.
Labor advocates warn this could incentivize employers to overwork existing staff rather than hire, especially in industries like construction, where labor shortages persist.
Proponents, including the National Association of Manufacturers, counter that the deduction empowers workers to earn more without tax penalties. They argue it complements economic growth by increasing disposable income, potentially spurring consumer spending.
Data from ithe Bureau of Labor Statistics shows 30% of full-time workers logged overtime in 2024, suggesting a broad potential impact.
Still, the policy’s temporary nature—ending in 2028—creates uncertainty. Will it be extended, or is it a short-term political win?
For now, workers like John are planning for a modest financial boost, but the deduction’s success hinges on broader economic factors, like inflation and wage growth, which could outpace its benefits.
