For many people in the United States, working overtime is a financial lifeline, helping to cover rising grocery bills, unexpected expenses, or simply keep up with the cost of living.
Data suggest that almost 25% of workers regularly work more than 40 hours a week, though some studies put that number as high as 40%.
While those extra hours can mean a bigger paycheck for some, they often also mean a bigger tax bill since, at the federal level, overtime pay is taxed just like regular wages.
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So, with high prices squeezing household budgets and many employers relying on overtime to fill staffing gaps, some lawmakers in Congress have proposed a new tax break for workers who put in extra hours.
Enter the Overtime Wages Tax Relief Act, which, if passed, would allow millions of employees to deduct a portion of their overtime earnings from their taxable income. Its sponsors say it would put more money back in workers’ pockets at tax time.
But what’s in the proposal, who could benefit, and how does it compare to Trump’s no tax on overtime pledge?
New bill would offer a tax deduction for overtime wages
The Overtime Wages Tax Relief Act was introduced by Sens. Roger Marshall (R-Kan.) and Tommy Tuberville (R-Ala.) last week.
As mentioned, the bill is designed to let workers deduct up to 20% of their overtime pay from their federal taxable income.
It’s important to note that currently, in 2025, all wages, including overtime, are taxed as ordinary income. So, your overtime pay is subject to normal federal income tax rates and withholdings.
However, for some workers, taking on extra shifts can push them into a higher tax bracket, and that, in turn, can reduce the incentive to work more.
Other key points:
- The deduction would be capped at $10,000 for individuals and $20,000 for married couples filing jointly.
- The benefit would phase out for higher earners, starting at $100,000 for individuals and $200,000 for joint filers, with the deduction reduced by $50 for every $1,000 over those limits.
Additionally, the deduction would be available for overtime pay earned between 2025 and 2029, and could be claimed even by those who take the standard deduction (i.e., don’t itemize deductions).
Overtime tax deduction: Who would benefit?
The proposed deduction is reportedly designed for middle-income workers who regularly rely on overtime pay.
Sen. Tuberville said the bill would “give relief” to Americans such as nurses and factory workers, adding, “It sends a message to the country that hard work matters.”
It seems that includes nurses, first responders, factory and warehouse employees, utility workers, and transportation professionals — people who often work beyond 40 hours a week to keep up with demand or cover staff shortages.
For example, a nurse who earns $15,000 in overtime pay and is under the income limit could deduct $3,000 (20%) from taxable income. In the 22% tax bracket, that’s a tax savings of $660. A married couple with $20,000 in overtime pay could save up to $4,400 in the same bracket.
However, it’s important to note that the bill wouldn’t change how your paycheck is taxed throughout the year.
- Taxes would still be withheld from overtime pay as usual.
- Workers would only see the benefit when they file their tax return and claim the deduction.
Still, supporters say the bill would help families keep more of their earnings without raising base wages or complicating payroll systems.
Some critics, however, argue that the deduction may disproportionately benefit those earning near the income cutoffs and could make the tax code more complex.
There are also concerns about the cost. Estimates suggest the deduction could reduce federal tax revenue by over a trillion in the next decade.
No tax on overtime: What about Trump’s promise?
As Kiplinger has reported, during his 2024 presidential campaign, Donald Trump pledged to make all overtime pay tax-free. Some see the current deduction proposal as a step toward that goal, but it isn’t a full exemption.
Under the Overtime Wages Tax Relief Act, workers would still pay taxes on their overtime earnings throughout the year and would only get relief when they file their federal tax returns.
On the other hand, Trump’s plan would exclude all overtime pay from federal income tax.
On May 12, the House Ways and Means Committee released the text of $4 trillion proposed legislation (dubbed Trump’s “one big beautiful bill“) that would end taxes on overtime pay (and tips) for three years (from 2025 through 2028).
To claim the deduction, you would need a Social Security number, and Fair Labor Standards Act rules would apply.
But, if approved, supporters say the provision would provide immediate take-home pay increases for eligible workers.
Overtime pay tax relief: Bottom line
The Overtime Wages Tax Relief Act might become part of larger tax reform in the coming months. To become law, Trump’s “one big beautiful bill” must pass both chambers of Congress and be signed by the president.
What does this mean for you? If you work overtime, this tax deduction proposal could mean a bigger federal tax refund or a lower tax bill starting next year. But an overtime pay deduction wouldn’t be as sweeping as Trump’s campaign promise to eliminate taxes on overtime pay, which is proposed in the House plan, but on a temporary basis.
And if you’re wondering about state taxes, remember: Alabama is the only state that currently exempts overtime pay from state income tax, thanks to a law that became effective last year. However, that exemption is set to expire on June 30, 2025, unless extended by new legislation.
Overall, it’s important to pay attention to any tax law changes that impact your wallet. And, as always, consult a tax professional to see how these or other potential changes could affect your finances.
