The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4th, 2025. One key change included as part of the tax bill is a new deduction for qualified overtime pay received for tax years 2025-2028. Below are key points to note regarding eligibility and limitations of the new deduction for overtime pay.
What has changed?
- Overtime pay has historically been taxable income to the recipient. The OBBBA passed in 2025 now allows up to a $12,500 (25,000 for MFJ) deduction for qualified overtime compensation received
- The deduction is available to taxpayers who claim the standard deduction or who itemize and is available beginning in 2025 (this year) through 2028
- The deduction phases out when the taxpayer’s modified adjusted gross exceeds $150,000 ($300,000 for MFJ)
What pay is eligible for the deduction?
- Qualified overtime is overtime pay required by the Fair Labor Standards Act (FLSA) and is described as hours worked over 40 in a work week
- More generous overtime payments (employer incentive pay, state overtime regulations, etc.) are not included
- Only the premium portion of overtime is included. This represents the pay over the regular rate. If the overtime is paid at 1 ½ times the pay rate, the ½ time portion is eligible pay for the deduction
- Employers are able to use “any reasonable method” specified by the treasury secretary to estimate overtime for 2025
- The Treasury will issue further guidance on reasonable methods, changes in tax forms, and instructions and processes for the treatment of these deductions, in the coming months
If you have any questions, or if you would like to schedule an appointment to understand the impact of these changes on your situation, please do not hesitate to contact our team. Appointments can be scheduled online by visiting our website at www.ongandcompany.com.