A provision of the recent tax legislation signed into law by President Trump on July 4, 2025, provides generally that taxpayers who receive income in the form of overtime pay will not be taxed on their overtime income.  The deduction will apply only to that amount of pay that is due to the overtime status. The basic hourly pay rate paid during an overtime period remains taxable. For example, if an employee who is paid a regular wage of $20 per hour works 4 hours of overtime at $30 per hour (time and a half), only the extra $10 per hour amount of the pay qualifies for the deduction.

The way this will be implemented, however, is not exactly straightforward. It won’t be done by an employer not withhold taxes on that portion of a paycheck that constitutes overtime pay. A taxpayer will have to claim the benefit as a deduction on his tax return at the time of filing the tax return.  The value of the new deduction will be reflected in the taxpayer getting either a larger refund or seeing a greater reduction in his total tax bill depending on the particulars of the return.

Certain qualifications and limitations apply. The maximum deduction is capped at $12,500 for an individual and $25,000 for joint filers. The deduction phases out for taxpayers whose income exceeds $150,000 or $300,0000 if filing a Joint return. The deduction applies both to those who itemize decutions and those who don’t itemize.

Other similar changes in tax law were made in the new legislation. These changes are commonly referred to, in a shorthand way, as No Tax on Tips and No Tax on Social Security. I will have more to say about those in later posts.