No Tax on OT? The Hidden Catch Leaving Millions Behind

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The “no tax on overtime” provision went into effect for pay received beginning in 2025 as part of President Trump’s One Big Beautiful Bill Act, signed July 4, 2025. It allows eligible workers to deduct a portion of their overtime pay from taxable income, aiming to reward extra hours on the clock. But the headline—no taxes on all overtime—is misleading. Under the law, only the premium portion of overtime pay is deductible. If an employee earns $20 per hour and $30 per hour for overtime (time-and-a-half), only the extra $10 counts as “qualified” and escapes federal income tax. The IRS still taxes the base $20 hourly wage on those overtime hours. That distinction narrows the actual benefit for most workers. The deduction carries strict limits. Individuals may exclude up to $12,500 in overtime premiums each year (joint filers $25,000), with the break phasing out once adjusted gross income exceeds $150,000. By the time income hits $275,000 (or $300,000 for couples), the entire deduction vanishes. And unless Congress acts, the provision sunsets after 2028. Equally important, not every worker qualifies. Only “qualified overtime compensation” under the Fair Labor Standards Act counts—meaning non-exempt, hourly staff whose pay fluctuates with hours worked. Salaried employees classified as exempt—often in administrative or other white-collar roles—don’t qualify, nor do workers on flat salaries that don’t track extra hours. In practice, the average U.S. worker stands to save roughly $200 per year from this change, according to the Tax Foundation, making it more of a modest perk than a sweeping reform. The patchwork of caps, income thresholds, and eligibility rules means many who log extra hours will still see their full overtime taxed. Before banking on the break, workers must verify that their job classification and income level actually allow them to claim the deduction.