No Tax On Overtime – The "One Big Beautiful Bill Act," enacted July 4, Requests for overtime pay to be exempt from federal income tax have long been a rallying cry for workers’ rights advocates, but the reality of the new deduction, effective January 1, 2025, is more complex.
Allowing single filers to deduct up to $12,500 and joint filers $25,000 of FLSA-qualified overtime pay, the policy aims to reward extra hours. Yet, its temporary nature and selective benefits spark debate: is this a game-changer or a political maneuver?
For workers like Sarah, a delivery driver in Texas logging 15 overtime hours weekly, the deduction could mean $3,000 in tax savings, assuming she’s in the 24% bracket.
This could cover rent or medical bills, offering relief in an economy where 60% of Americans live paycheck to paycheck, per a 2024 LendingClub survey.
The policy’s focus on FLSA overtime ensures it targets legally mandated extra pay, affecting roughly 15 million workers, according to the Economic Policy Institute.
Economists see potential ripple effects. Increased take-home pay could boost consumer spending, which drives 70% of U.S. GDP. Small businesses, particularly in retail and hospitality, may see reduced pressure to raise wages if workers keep more overtime earnings.
However, the deduction’s $150 billion cost over four years, per Congressional Budget Office estimates, raises concerns about federal deficits, especially without offsetting revenue.
Skeptics argue the policy favors optics over substance. Low-income workers, whose federal tax liability is often zero, gain little, while high earners face phase-outs. Payroll and state taxes persist, and without Alabama-style state exemptions, relief is uneven.
The Trump administration’s decision to reverse expanded overtime eligibility rules further limits the deduction’s reach, potentially excluding millions who might have qualified.
Labor groups fear employers may exploit the policy, leaning on overtime to avoid hiring. Historical data shows overtime hours spiked 10% after similar tax incentives in the 1980s. Meanwhile, the 2028 expiration date leaves workers uncertain, with no guarantee of renewal.
Supporters, including Republican lawmakers, frame the deduction as a pro-worker reform, aligning with Trump’s populist agenda.
Whether it delivers lasting economic gains or serves as a fleeting political win depends on implementation and broader tax policy. For now, workers like Sarah are hopeful but wary, knowing the fine print matters as much as the headlines.
