OBBBA establishes a “no tax on overtime” pay beginning in 2025 and running through 2028. While it is not a total “no tax on overtime pay”, most earners will benefit. Greetings, Lynn Spencer here. Today, I will explain the nuances of OBBBA’s qualified overtime income deduction.

Overtime Deduction Basics –

  • The new overtime deduction can be claimed whether itemized or not.
  • The overtime pay deduction is not an “above the line” deduction that reduces Adjusted Gross Income (AGI) which can make one eligible for more federal income tax breaks.
  • This is a federal deduction – not an exclusion – so federal payroll taxes still apply to overtime income, including amounts that are offset by the overtime deduction for federal income tax purposes. State and local income taxes may still apply.
  • A married taxpayer must file a joint return to claim the overtime deduction.
  • Up to $12,500 each year for single filers.
  • Up to $25,000 each year for married joint filers.
  • The deduction begins to phase out when your modified adjusted gross income (MAGI) exceeds:
  • $150,000 for single filers
  • $300,000 for married joint filers
  • The deduction decreases by $100 for every $1,000 of income above these thresholds and fully phases out at $275,000 MAGI for single filers, and $550,000 MAGI for joint filers. Employers must report qualified overtime income on form W-2, or another IRS specified statement.
  • Business owners with more than 20% ownership cannot pay themselves “overtime” to claim the deduction, since overtime law excludes owners who actively manage their corporations.

Killingsworth Spencer is here to help our clients fully understand their options to save taxes today and in the future. We have CPAs, Enrolled Agents, Bookkeepers, and payroll specialists on staff to help our clients with accounting and tax-related matters. For more information or to schedule an appointment, please call us at 770-552-8286. Visit us at www.killingsworthspencerllc.com

  • Disclaimer: This post is for general information only and should not be taken as legal or financial advice.