Tax Planning
How the ‘No Tax on Overtime’ Deduction Under the One, Big, Beautiful Bill Can Boost Your Take-Home Pay
The OBBB Act introduces a new overtime compensation deduction for 2025-28—here’s how it works, who qualifies, and how to maximize the benefit.
By NomadicTax Research Team • 5-8 min read • November 21, 2025
## What Is the “No Tax on Overtime” Deduction?
The One, Big, Beautiful Bill (Public Law 119-21), signed into law on July 4, 2025, introduces a deduction allowing individuals to deduct **qualified overtime compensation**—the portion of pay that exceeds their regular rate under the Fair Labor Standards Act. This applies for tax years **2025 through 2028**. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-of-2025-provisions?utm_source=openai))
### Key Details
- **Maximum deduction**: $12,500 for single filers; $25,000 for married filing jointly. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-of-2025-provisions?utm_source=openai))
- **Phase-out thresholds**: Begins when modified adjusted gross income (MAGI) exceeds $150,000 for singles; $300,000 for joint filers. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors?utm_source=openai))
- **Who qualifies**: Both itemizing and non-itemizing taxpayers may use this. Employers/payors must issue statements showing the overtime amount. Must include SSN; married filing jointly to claim joint deduction. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-of-2025-provisions?utm_source=openai))
## Actionable Steps to Claim It
1. **Track your overtime pay clearly**: Keep pay stubs and employer statements that separate regular vs. overtime compensation.
2. **Verify reporting obligations**: Employers and other payors must provide information returns to you showing qualified overtime paid. If not, claiming may be harder.
3. **Ensure income documentation includes your SSN**: It’s required on relevant returns/statements.
4. **Adjust with your MAGI in mind**: If your MAGI is near or above phase-out levels, plan deductions accordingly (e.g., defer income, increase deduction-eligible expenses).
## Example Scenario
- *Single filer*: earns $160,000 (MAGI) and receives $8,000 in overtime pay. The deduction phases out if MAGI > $150,000; this taxpayer would be eligible for a **partial** deduction. Use IRS tables to compute exactly, but they would likely get only part of the full $12,500.
- *Married jointly*: spouses earn combined MAGI of $250,000, including $20,000 overtime. Full $25,000 deduction possible since $250,000 < $300,000 phase-out threshold. Document separately each spouse’s qualifying overtime if filing jointly.
## Potential Pitfalls & Tips
- Self-employed individuals in a Specified Service Trade or Business (SSTB) under section 199A are **not eligible**, nor are employees in an employer who is in an SSTB. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors?utm_source=openai))
- Overtime reporting must match employer/payor statements; any discrepancies could delay or negate deductions. Audit risk if reporting inadequate.
- Remember this is a temporary benefit (2025-2028). Plan accordingly: might adjust your financial strategy in future years when reverts.
## Why It Matters
For many hourly workers, overtime adds a significant portion of income. This deduction represents a shift in tax relief: rather than taxing all wages, this gives relief for overtime often taxed at higher effective rates. For individuals working extra shifts, this could mean hundreds or thousands more retained each year. Plus, employers must adapt reporting systems to comply.
## Final Thoughts
To leverage this deduction fully: monitor your overtime, ensure correct income reporting, understand phase-outs, and confirm eligibility (especially with respect to SSTB rules). It’s new territory—getting documentation tight now will reduce issues when you file for 2025 and beyond.