Do you regularly earn overtime pay? If so, the One Big Beautiful Bill Act (OBBBA) may help reduce your federal income taxes.

New overtime deduction

Before 2025, all overtime pay was fully taxable as ordinary income. Starting in 2025 and running through 2028, the OBBBA introduces a temporary deduction for qualified overtime income:

• Up to $12,500 per year for single filers
• Up to $25,000 per year for married couples filing jointly

This deduction is available whether or not you itemize.

What counts as qualified overtime income

Qualified overtime income includes only the overtime premium, not your full hourly wage. In general, this is the portion of pay above your regular rate under the Fair Labor Standards Act.

Example:
If your normal rate is $25 per hour and your overtime rate is $37.50, the extra $12.50 per hour is considered qualified overtime income.

Important limitations:

• This deduction does not reduce adjusted gross income (AGI)
• Overtime pay is still subject to payroll taxes
• State and local taxes may still apply

Income phaseouts

The deduction begins to phase out once modified adjusted gross income (MAGI) exceeds:

• $150,000 for single filers
• $300,000 for married couples filing jointly

The deduction is reduced by $100 for every $1,000 of income above these limits. The phaseout is fully complete at:

• $275,000 for single filers
• $550,000 for joint filers

Because these thresholds are relatively high, most overtime earners will qualify for the full deduction.

Key rules to be aware of

• Married taxpayers must file jointly to claim the $25,000 deduction
• A valid Social Security number must be included on the return
• Employers must properly report qualified overtime income on the W-2 or another IRS-approved statement
• Business owners cannot pay themselves “overtime” to claim this deduction, as the law excludes owners who actively manage their businesses