Not the full overtime paycheck: only the premium half. That distinction is where most people get confused about the OBBBA overtime deduction.
When you work overtime (over 40 hours/week under FLSA rules), your employer pays you time-and-a-half. The "qualified overtime compensation" eligible for this deduction is only the premium portion. The extra 50% on top of your regular hourly rate. Your regular rate for those overtime hours is still fully taxable.
Breaking it down with actual numbers
Sarah earns $30/hour. She works 50 hours in a week (10 overtime hours).
- Regular pay for OT hours: 10 × $30 = $300 (NOT deductible)
- Premium pay for OT hours: 10 × $15 = $150 (THIS is the qualified overtime compensation)
- Sarah's deductible amount for that week: $150
Over 48 working weeks with 10 OT hours each, Sarah's annual premium = $7,200. She deducts all of it (below the $12,500 cap). At a 22% marginal rate, she saves $1,584 in federal income tax.
The caps and phase-outs
- Single/HOH: Maximum deduction $12,500/year. Phase-out: $150,000-$275,000 MAGI.
- Married Filing Jointly: Maximum $25,000/year. Phase-out: $300,000-$550,000 MAGI.
- Only W-2 employees qualify. Independent contractors are excluded entirely.
- Effective for tax years 2025-2028 only.
Why this specifically targets blue-collar workers
The $150,000 phase-out and the W-2-only rule mean this benefit flows primarily to hourly manufacturing, logistics, healthcare, and service workers. A warehouse worker earning $25/hour with consistent overtime stands to save $1,000-$2,000/year in real tax money.
