The “No Tax on Overtime” law of Trump is now in force; notwithstanding, some Americans do not even qualify. President Trump’s widely promoted “No Tax on Overtime” provision became one with the grand One Big Beautiful Bill on July 4, 2025. This law is a huge change for many workers in America in that they can deduct most of their overtime earnings from federal income tax. But with the fanfare comes some caveats and eligibility conditions that may in fact result in some not cashing in under this new law.
What is “No Tax on Overtime” law?
The new law sets out an above-the-line tax deduction wherein qualified overtime pay does not qualify for federal tax. Specifically, it allows workers to deduct the “half” portion of overtime compensation-the premium which results from working overtime hours paid at “time and a half.” For example, if an employee were to work overtime, earning his normal hourly wage of $20, multiplied by 1 and a half (at $30), his overtime rate will be exempt from federal income tax by $10 (that is, “half”).
This deduction applies to overtime compensation owed under the Fair Labor Standards Act (FLSA) and which is reported via the appropriate wage form, whether it is on a W-2 or 1099 form.
Key details and limitations on the deduction
- Maximum deductions: an individual may deduct up to $12,500 of the qualified overtime pay expense incurred in a calendar year ($25,000 if married filing jointly).
- Income limits: taxpayers with an income level not exceeding $150,000 (joint filers: $300,000) will be entitled to the full deduction, and then for every $1,000 income exceeding the set limit, the deduction will begin to phase out at the rate of $100.
- Application period: This provision is retroactive with effect from January 1, 2025, and shall remain applicable until December 31, 2028.
- No effect on payroll taxes: The deduction is applicable only on federal income taxes. The Social Security and Medicare taxes are applicable to overtime wages.
Employers will separately report overtime on W-2 forms.
Who will not qualify?
However, not every American worker benefits from this consolation:
- Exempt employees: Those considered exempt under the Fair Labor Standards Act are therefore not entitled to overtime pay and thus may never lay claim to this deduction. Exempt employees are normally those managers who work for salary, along with professionals who do not qualify to recover overtime premium pay.
- Workers without a valid Social Security Number: To claim this deduction, taxpayers must have a valid Social Security number.
- Who do not have qualified overtime: Workers who have not done overtime and have not been paid the premium “time and a half” rate do not qualify.
- Higher income earners: Employees who earn above income thresholds will have their deduction decreased or eliminated.
- Non-overtime premiums: Overtime premiums mandated by state laws or collective bargaining agreements are not eligible for this deduction.
The “No Tax on Overtime” law is just one feature in President Trump’s One Big Beautiful Bill, which also offers similar tax benefits for tips and Social Security benefits. The Act seeks to lessen the tax burden for the middle and lower income workers that rely upon overtime and tips for a substantial part of their income.
How to claim the deduction
In order to claim this new law, workers will have to:
- File their tax return with their Social Security number.
- Ensure that their employer separately reports the qualified overtime pay on their W-2.
- Claim the deduction as an above-the-line deduction for federal income tax.
This means that not only non-itemizers can claim this deduction but also the standard deduction, fostering the work of many Americans.
Not a universally good scheme but greatly helpful for many
Though the “No Tax on Overtime” law provides a much-needed tax relief, estimated to save qualified workers up to $12,500 in federal income tax for overtime earnings, this great provision does not apply to every person in the United States. Exempt employees, high-income earners, and employees without qualifying overtime will not benefit from this so-called “little-known trick”.
Even so, for millions of workers who routinely put in overtime hours, this law gives some much-needed financial relief and is set to be one of the most significant federal tax changes for 2025.
This law is already in effect for tax year 2025, so workers must carefully examine their pay and tax sheets to see if they qualify and that their employers have reported overtime correctly.
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