The One Big Beautiful Bill Act (OBBBA) introduces several significant changes for taxpayers, including new federal income tax deductions for qualified overtime wages, effective for tax years 2025 through 2028. Some of these provisions are retroactively effective as of January 1, 2025, impacting tax reporting. The OBBBA builds upon and modifies elements of the 2017 Tax Cuts and Jobs Act (TCJA), many of which were set to expire at the end of 2025.
Important Considerations
While these deductions offer potential tax savings, there are two important considerations:
- Detailed qualifications: The deductions come with specific eligibility requirements.
- Delayed impact: The benefits will primarily be realized when filing annual tax returns, rather than through immediate payroll adjustments.
Definition of Qualified Overtime
The OBBBA allows taxpayers to deduct qualified overtime wages, but not all overtime qualifies.
- Eligibility: Only overtime wages required under Section 7 of the Fair Labor Standards Act (FLSA) are considered “qualified overtime.”
- Exclusions: Overtime wages not mandated by the FLSA are excluded. Examples include:
- Collective bargaining agreements: Some agreements may require overtime that falls outside FLSA guidelines.
- Motor carrier exemption: Employees whose duties impact the safety of motor vehicles in interstate commerce (e.g., truck drivers) are exempt from FLSA overtime requirements.
- Voluntary overtime: Employees who work for companies that pay overtime voluntarily, without legal obligation, cannot count these wages as qualified overtime.
Deduction Limits
- Cap: The deduction is limited to $12,500 for single filers and $25,000 for married taxpayers filing jointly.
- Premium portion only: The deduction applies solely to the premium portion of overtime wages (e.g., the additional pay for hours worked beyond 40 hours per week).
Additional Considerations
Impact on Federal Taxes
The new overtime wage deductions reduce taxable income, rather than being categorized as itemized expenses. This means taxpayers can benefit from the deductions regardless of whether they itemize or use the standard deduction. However, the deductions only apply to federal income taxes and do not affect Medicare or Social Security taxes.
Timing of Tax Benefits
Unlike previous tax reductions that adjusted payroll withholding tables to increase take-home pay, these deductions will be realized when taxpayers file their annual Form 1040. As a result, employees may see larger refunds when filing their 2025 tax returns rather than immediate increases in their paychecks.
RKL is here to help you navigate these changes when filing your taxes. Reach out to an RKL advisor today.
