No Tax on Overtime (OBBBA) - 406financialsolutions.com

Max Annual Deduction: $12,500 Individuals; $25,000 Joint Filers

Effective Dates: 2025 – 2028

Phase Out: Modified Adjusted Gross Income over $150,000 ($300,000 joint filers)

There are several new tax laws that passed with the One Beautiful Bill Act (OBBBA) signed into law on July 4^th, 2025. This series will take a closer look at several of those provisions so you can get the information you need.

One tax law change that occurred with the OBBBA is the No Tax on Overtime provision. It is important to understand that not all overtime is treated the same when it comes to this provision, as detailed below.

This provision provides a tax deduction for qualified overtime premiums paid in excess of normal pay (the .5 of 1.5 x pay) that is required under FLSA. The deduction is up to $12,500 per year for individuals, or $25,000 for joint filers. This deduction is for qualified overtime earned in tax years 2025 – 2028. The deduction phases out for taxpayers with modified adjusted gross income over $150,000 for individuals, or $300,000 for joint filers.

What do you mean required under FLSA?

According to Congress.gov, “The Fair Labor Standards Act (FLSA) provides workers with minimum wage, overtime pay, and child labor protections. The FLSA covers most, but not all, private and public sector employees. In addition, certain employers and employees are exempt from coverage… The FLSA requires employers to pay at least time-and-a-half to covered, nonexempt employees who work more than 40 hours in a week at a given job.” (7)

In other words, if you are like the majority of Americans and work a 40 hour workweek, you are most likely covered under FLSA, and the hours worked in excess of 40 hours are required to be paid at time-and-a-half. The half time of those hours would be deductible under this provision.

Here is the kicker for some groups, particularly firefighters.

Only a certain portion of overtime qualifies when it comes to Firefighters. According to the IAFF’s website, “Under the bill, members who work more than 53 hours per week – the threshold set for fire fighters by the Fair Labor Standards Act (FLSA) – would qualify for the deduction when filing their federal tax return. Members not on a 53-hour schedule would need to work more than 212 hours in a 28-day cycle to be eligible.” (2)

Example

You are a paid professional firefighter who works a 24 hour on 48 hour off shift schedule. You average 168 hours in a 27 day cycle. Your base pay is $30/hour. You work one 24 hour extra shift each month of the year in 2025. Each month you work an extra shift, your total hours worked for that 27 day pay cycle are 192 hours (168 + 24). Your eligible hours above the 204 hour threshold (212 hour for a 28 day cycle) are 0 hours for the year. You would need to work at least 36 hours of overtime, or typically two shifts, before any additional overtime would qualify per pay cycle. In this scenario you would receive 288 hours of overtime throughout the year, and none of it would qualify for the “No Tax On Overtime” deduction (yikes).

In summary, the title “No Tax On Overtime” is misleading at best, and flat out wrong at worst. A more accurate title would read something like “No Federal Income Tax on 1/3 of Some Peoples Overtime Pay”. As with many tax laws, if you are wondering if this applies to you, the answer is: It depends. It depends on where you work, and whether you are covered or exempt from FLSA overtime rules.

If you have any other questions feel free to reach out to me, or your trusted tax advisor.

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