Proposed Bill Offers Tax Deduction on Overtime Pay: Capped at 300 Hours, Income Limits Apply, Starts 2025

A new piece of legislation, dubbed the "No Tax on Overtime Act," is proposing a federal tax deduction for certain overtime pay. If enacted, this would allow eligible taxpayers to deduct income earned from "qualified overtime compensation" starting with the 2025 tax year (taxable years beginning after December 31, 2024). The core idea is to give a bit of a tax break on those extra hours some folks put in.

The Overtime Pay Perk: What's on the Table?

So, what exactly counts? The bill defines "qualified overtime compensation" as overtime pay that's required under Section 7 of the Fair Labor Standards Act of 1938 – basically, the federal law that says many hourly employees get time-and-a-half if they work more than 40 hours a week. This deduction, however, isn't unlimited. According to Section 2, you could deduct the pay for a maximum of 300 hours of such overtime work per tax year. If you're married and filing jointly, good news: that 300-hour limit applies separately to each spouse.

There's also an income catch. The proposed deduction starts to shrink if your modified adjusted gross income (MAGI) goes over $100,000. For every $1,000 your MAGI is above that threshold, the deduction gets reduced by $100. For clarity, MAGI here includes certain income typically excluded, like some foreign earned income (as detailed in sections 911, 931, or 933 of the tax code).

Red Tape and W-2s: How It Would Work

To claim this overtime deduction, Section 2 lays out a few administrative details. You'll need to include the Social Security number of the person who actually earned the overtime pay on the tax return. Miss that, and the IRS can treat it as a "mathematical or clerical error" under section 6213(g)(2), which means they can adjust your return more quickly.

Employers would also have a new task: they'd be required to report the total amount of this qualified overtime compensation on your Form W-2, thanks to an amendment to section 6051(a). This should make it easier to track and claim. On the plus side for many, the bill amends section 63(b) so that even if you don't itemize deductions on your tax return (meaning you take the standard deduction), you could still claim this overtime break. Finally, the Treasury Secretary is directed to update the income tax withholding tables and procedures (under section 3402(a)) to account for this new deduction, which might mean a slight adjustment to your paycheck withholdings if you regularly earn this type of overtime.

Who's Cashing In? The Real-World Breakdown

This proposed change would primarily benefit hourly workers covered by federal overtime rules who put in extra hours beyond their standard 40-hour week, especially those whose income falls comfortably below the $100,000 phase-out threshold. Think about folks in manufacturing, construction, or certain healthcare roles where overtime is common. For them, this could mean a little more take-home pay from those longer weeks.

However, the 300-hour annual cap (roughly equivalent to 6 hours of overtime per week for 50 weeks) means that individuals who work extensive overtime beyond this limit won't get a tax break on all of it. Similarly, higher-income earners will see the benefit reduce or disappear entirely. It also won't impact salaried employees who aren't eligible for FLSA-mandated overtime, or those in jobs where overtime isn't typically offered. While the bill aims to reward extra work, the 300-hour cap could subtly influence how some employers or employees approach overtime scheduling, though the primary driver will likely remain operational needs.