Trump's Overtime Tax Break Risks Filing Errors
Millions have claimed Trump's new "no tax on overtime" deduction allowing workers to deduct up to $12,500 (singles) or $25,000 (married) of overtime pay from 2025-2028 taxes. Experts warn of potential filing mistakes due to reporting confusion — the deduction is significant but may complicate tax preparation. Taxpayers should review IRS guidance carefully or consult tax professionals.
The tax break is part of the "One Big Beautiful Bill Act" (OBBBA), signed into law on July 4, 2025. The provision is temporary, applying to federal income tax returns for the years 2025 through 2028. Unless extended by Congress, this deduction is currently scheduled to expire. A key point of confusion is that the deduction does not make all overtime pay tax-free. It only applies to the "premium" portion of overtime pay as required by the Fair Labor Standards Act (FLSA). For a worker paid time-and-a-half, only the extra "half" pay is eligible for the deduction, not the entire overtime wage. This distinction is a primary source for potential filing errors. For the 2025 tax year, the IRS has granted penalty relief to employers who do not separately report the "qualified overtime compensation" on Form W-2, meaning taxpayers must calculate the deductible amount themselves using their own payroll records. Starting with the 2026 tax year, employers will be required to report this specific amount. The deduction has income limitations. It begins to phase out for single filers with a modified adjusted gross income (MAGI) over $150,000 and for married couples filing jointly with a MAGI over $300,000. Additionally, workers must file a joint return if married to claim the deduction. The measure is not available to all workers. To be eligible, an employee must be covered by the FLSA's overtime rules. Overtime pay that is based solely on state law or an employer's policy, and not required by the FLSA, may not qualify for the deduction. While the deduction reduces federal income tax, it does not affect federal payroll taxes. Social Security and Medicare taxes will still be withheld from the full amount of overtime pay. Furthermore, the federal deduction does not automatically apply to state income taxes, which will depend on individual state laws. The Joint Committee on Taxation estimates the deduction will reduce federal revenue by approximately $90 billion over the four years it is in effect. Analyses suggest that the primary beneficiaries of the tax cut will be middle-income households.
