Is Trump Removing Tax on Overtime? What Most People Get Wrong

You've probably heard the buzz at the water cooler or seen the clips floating around social media. The idea that overtime pay could be totally tax-free sounds like a dream for anyone pulling 60-hour weeks. But honestly, the reality is a bit more nuanced than the headlines suggest.

While the policy is officially in play as of early 2026, it isn't a "magic wand" that makes your entire paycheck tax-exempt. It’s actually a specific part of the One Big Beautiful Bill (OBBBA), which President Trump signed into law on July 4, 2025.

So, yes, it's real. But there are rules. Lots of them.

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The Overtime Tax Exemption: How It Actually Works

Basically, the law creates a new federal income tax deduction for "qualified overtime compensation." This is retroactive, meaning it covers overtime you worked starting January 1, 2025. If you're sitting down to do your taxes right now in early 2026, you're looking at the first year this benefit actually hits your wallet.

Here is the kicker: It only applies to the "extra" part of your overtime pay.

Think about it this way. If you make $20 an hour normally and $30 an hour for overtime, you aren't deducting the whole $30. You’re only deducting the $10 "premium" — the time-and-a-half portion required by the Fair Labor Standards Act (FLSA).

Who gets to claim it?

Not everyone is invited to the party. To qualify, you generally have to be a non-exempt employee under the FLSA. This usually means hourly workers. If you’re a salaried manager who doesn't get paid extra for staying late, this law doesn't really change your tax bill.

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You also need a valid Social Security number. And if you're married but filing separately? You're out of luck. The law specifically blocks that filing status from claiming the deduction.

The Limits and the "Phase-Out"

Don't expect to deduct an infinite amount of money. The IRS has set a ceiling.

• Single Filers: You can deduct up to $12,500 of qualified overtime pay.
• Joint Filers: The cap moves up to $25,000.

Then there’s the income limit. If you’re already making a high salary, the government starts clawing that benefit back. For individuals, the "phase-out" begins at a Modified Adjusted Gross Income (MAGI) of $150,000. For every $1,000 you earn over that, your deduction drops by $100. Once you hit $275,000 ($550,000 for joint filers), the deduction hits zero.

It's a middle-class tax break, plain and simple.

What About Social Security and State Taxes?

This is where people get tripped up. The "No Tax on Overtime" rule only applies to federal income tax.

You still have to pay:

1. Social Security (6.2%)
2. Medicare (1.45%)
3. State Income Tax (unless you live in a place like Florida or Texas, or your specific state passes a matching law, which some like Wisconsin are currently debating).

Your employer is still going to withhold those payroll taxes from your check. You won't see the full "tax-free" benefit until you file your return and see that deduction lower your taxable income.

The 2025 "Grace Period"

Since the law passed in the middle of 2025, the IRS gave businesses a bit of a break. For the 2025 tax year, employers weren't required to have perfect reporting systems in place. They were allowed to use "any reasonable method" to estimate your overtime pay.

However, for the work you're doing right now in 2026, the rules are stricter. Employers are now using a specific code — Code "TT" in Box 12 of the W-2 — to report exactly how much qualified overtime you earned.

Why This Matters for the Economy

Economists are split on this one. Groups like the Tax Foundation suggest it could lead to bigger refunds this year, averaging anywhere from $300 to $1,000 for many workers. On the flip side, the Committee for a Responsible Federal Budget points out that this could add about $90 billion to the national debt over the next few years.

There's also the "effort" argument. Some experts at the American Enterprise Institute argue that taxing overtime is basically a tax on hard work. By removing it, you're incentivizing people to pick up that extra shift.

But critics, including many labor advocates, worry it might encourage "overwork." If people feel they have to work 50 hours to get a tax break, it could lead to burnout. It's a classic trade-off between more money in the pocket and more time on the clock.

Your Next Steps to Maximize the Benefit

If you’re looking at your 2025 records or planning your 2026 budget, here is what you need to do:

• Check your W-2: Look for that Box 12 information. If your employer didn't break it out for 2025, you'll need to use your final pay stubs to calculate the "extra half" of your time-and-a-half pay.
• Update your withholding: If you're working a ton of overtime in 2026, talk to HR. You might want to adjust your W-4 so you get more of that money in your paycheck now rather than waiting for a refund next year.
• Watch the expiration date: As of now, this whole thing is temporary. It’s set to "sunset" or expire after December 31, 2028. Unless Congress votes to keep it, we go back to the old rules in 2029.
• Check State Laws: Keep an eye on your local news. Several states are currently trying to pass "copycat" bills so that you don't have to pay state income tax on overtime either.

This policy is one of the biggest shifts in how we think about "work" and "tax" in decades. It's not a total free-for-all, but for the person grinding out 45 or 50 hours a week in a factory or a hospital, it’s a very real chunk of change back in the bank.