What's Happening?
Congressional Republicans have enacted a provision in the One Big, Beautiful Bill, signed by President Trump, that offers a tax deduction on overtime pay. However, the deduction applies only to the earnings above the standard hourly wage, not the entire overtime pay. Single workers can deduct up to $12,500, while married workers can deduct up to $25,000. The benefit phases out for single filers earning above $150,000 and is unavailable for those earning over $275,000. Despite the tax break, workers will still owe payroll taxes for Social Security and Medicare on their overtime compensation, and state taxes may apply depending on local laws.
Why It's Important?
The tax deduction on overtime pay is designed to provide relief to middle- and upper-middle-income workers, with 85% of the benefit going to those earning between $100,000 and $500,000. This measure aims to incentivize overtime work and increase disposable income for eligible taxpayers. However, the limited scope of the deduction means that only about 9% of taxpayers will qualify, potentially leaving lower-income workers without significant benefits. The provision highlights ongoing debates about tax policy and its impact on different income groups.
What's Next?
The IRS is expected to issue regulations detailing eligibility and reporting requirements for the deduction. Employers will need to inform workers of their overtime earnings, as this information is not currently reported on W2 forms. The tax filing season will begin in January, and taxpayers will need to navigate the new deduction rules.
