Understanding the One Big Beautiful Bill Overtime Tax Deduction

On July 4, 2025, President Donald Trump signed P.L. 119-21, commonly known as the One Big Beautiful Bill Act (“OBBB”), into law. Among its many provisions is a temporary federal income tax deduction for qualifying overtime compensation. For tax years 2025 through 2028, the deduction allows eligible taxpayers to deduct a limited amount of qualified overtime compensation from federal taxable income, regardless of whether the taxpayer itemizes deductions or claims the standard deduction.

What is the Qualified Overtime Deduction?

In general, qualifying overtime means overtime compensation that is required to be paid under Section 7 of the Fair Labor Standards Act (“FLSA”). Additionally, only the premium portion of the payment counts towards the deduction, not the entire amount of the overtime payment.

Example: If a member’s regular rate is $30 per hour, and their overtime rate is $45 per hour, for purposes of the deduction, only the $15 per hour premium counts towards the deduction. Not the full $45 per hour.

How Much is the Deduction?

The maximum annual deduction is $12,500 for most individual filers and $25,000 for joint filers. Members should note that those married filing separately may not be eligible for the deduction.

The deduction begins to phase out once modified adjusted gross income (“MAGI”) exceeds $150,000 for individual filers and $300,000 for joint filers. Thereafter, the deduction is reduced by $100 for every $1,000 of MAGI above the applicable thresholds.

What Does Limited to FLSA-Required Overtime Mean?

The deduction is limited to overtime premiums that are required under the Fair Labor Standards Act. For most members, this means hours actually worked in excess of 80 or 84 hours in a two-week pay period (more on this in the next section). Importantly, because eligibility is based on hours actually worked, paid leave matters. If members use paid leave during a pay period, those hours do not count as hours worked for FLSA overtime purposes. As a result, paid leave can reduce, or in some cases eliminate, FLSA qualifying overtime that would have otherwise been paid in that pay period.

Separately, overtime premiums that exist solely because they are required by your collective bargaining agreement often do not constitute qualifying overtime compensation for the purposes of the deduction.

Work Period Considerations for Law Enforcement Employees

Many members’ public employers use a work period approach for police officers, which can change when overtime is required by the FLSA. When employees work under a work period structure, whether overtime is required by the FLSA is based on hours worked within an adopted work period, not simply whether the employee has worked more than 40 hours in a single week.

This matters because the tax deduction is tied to overtime that is required under the FLSA. In many situations, the overtime triggers in a member’s collective bargaining agreement will not align with overtime required under the FLSA.

When you prepare your income tax return, you will need to know which FLSA overtime method your employer uses. Most members can find this information by reviewing their collective bargaining agreement.

What to Expect for Tax Year 2025

For tax year 2025, members should not expect their W-2 to contain a dedicated box or line item that clearly identifies the amount of qualified overtime compensation that may be used to claim the deduction. As a result, members may need to substantiate any deduction claimed with their own payroll documentation. As such, it is recommended that members:

1. Print and retain all pay stubs for tax year 2025.
2. Keep any year-end payroll summaries or reports from their employer.
3. Be prepared to provide payroll records to an accountant or tax preparer if claiming the deduction.

If your employer’s reporting or classification of overtime worked does not appear to be consistent with the requirements described above, use caution when preparing your 2025 income tax return. Members may want to request clarification from their employer and consult a qualified tax professional for guidance based on their individual situation.

Employers are expected to separately report qualified overtime compensation on W-2s in future years. For 2025, members should plan to rely on check stubs and payroll records to calculate any deduction.

What the Deduction Does Not Change

The newly created deduction does not change your collective bargaining agreement. Your employer remains obligated to pay overtime as required by your CBA. The tax treatment of any portion of overtime compensation does not alter or waive any contractual rights.  

Examples

Example 1 – CBA OT vs. FLSA OT

A member is assigned to 12-hour shifts with one eight-hour short day per schedule cycle. During the cycle, the member is required to appear in court for three hours on a scheduled day off. Under the CBA, all off-duty court time is paid at an overtime rate, and the member will be paid three hours of overtime for court. For the pay period, the member has 83 hours worked (including the 3 hours in court).

If the employer uses an FLSA method under which overtime is not required until 86 hours are worked in the period, then no FLSA-required overtime was paid in this example. The three hours of overtime were paid because the CBA required it, not the law. This sort of overtime likely does not count as qualifying overtime compensation for purposes of the deduction.

Example 2 – Paid Leave Changing Hours Actually Worked

A member is scheduled for seven 12-hour shifts in a 14-day period. The member takes 12 hours of personal leave time for one shift and works the remaining six shifts, for 72 hours actually worked. Later in the same period, the member is called in for a 4-hour callback that is paid at an overtime rate under the CBA. The member’s pay stub will show the member was paid for 88 hours total in the period (72 hours worked, 12 hours personal leave, and 4 hours callback). However, for FLSA qualifying overtime purposes, the 12 leave hours do not count as hours worked. For the purposes of the deduction, the calculation is based on 76 hours worked, not 88 hours paid.

This release is provided for general information purposes only. It is not individual or personalized tax advice. Members should consult a qualified tax professional regarding eligibility and documentation.