The Great Big Beautiful Budget-Busting Overtime Tax Deduction Lallapaloosa

 “Take the 8:15 into the city
There's a whistle up above and people pushin', people shovin'
And the girls who try to look pretty
And if your train's on time, you can get to work by nine
And start your slaving job to get your pay
If you ever get annoyed, look at me I'm self-employed
I love to work at nothing all day

And I'll be taking care of business (every day)
Taking care of business (every way)
I've been taking care of business (it's all mine)
Taking care of business and working overtime….”

 --Randy Bachman, Bachman-Turner Overdrive, Takin’ Care of Business

It is time to pay your taxes, and many taxpayers are getting large refunds back as a result of Trump’s “One Big Beautiful Tax Bill” which was enacted and signed into law on July 4, 2025. The law had two key points -- it provided limited exceptions for taxes on tipped income and overtime income. This blog is about the latter deduction. As I explained in a prior blog, the tentacles of the 1938 Fair Labor Standards Act (“FLSA”) have reach through the corridors of time to shape modern tax policy. The One Big Beautiful Tax Bill Proves Why the FLSA Is Still the Most Important Law Enacted By Congress — Abrahams Wolf-Rodda, LLC

As I noted in that earlier blog:

Under the new tax law, the extra one-half premium pay portion of the overtime pay formula qualifies for a new deduction. Workers still have to pay taxes on the basic straight-time portion of their pay including for hours worked in excess of 40 hours in a week. You work overtime and get paid time and one-half for your effort, but only the extra one-half compensation earns you a tax deduction, if you are even eligible. Just the premium pay co-efficient portion of one-half qualifies for a deduction if it is required by the FLSA. Thus, the FLSA is the talisman of the new tax law.

For example, if you are receiving overtime premium pay which is not required by the FLSA, like the extra compensation is paid to airline employees, railroad workers and many other employees (including those professional or administrative) exempt from the FLSA, then you don’t get a tax deduction. Those workers covered by the Railway Labor Act exception to the FLSA coverage thus are left behind. The not so beautiful provisions of the Act also thus exclude premium daily overtime required by state laws like California or Alaska. If you get double overtime pay by union contract or California state law, this deduction will not protect that excess premium from taxation. That overtime premium is not a FLSA requirement. Accordingly, not all overtime pay is subject to the tax break, proving yet again that the devil is in the tax details.

The overtime pay deduction is also capped at $12,500 a year for individuals and $25,000 for married couples. However, it is available even if they take the standard deduction and do not itemize. Once the yearly income reaches $150,0 00 for individuals and $300,000 for married couples, the tax break starts to phase out. And because overtime premium pay is income to the worker, social security (FICA) and Medicare taxes are still due the tax man.

Id.

The new deduction applies to overtime hours worked from January 1, 2025, through December 31, 2028. But to get the deduction you must claim it on a filed tax return using Schedule 1-A to report "qualified overtime compensation". The Internal Revenue Service (“IRS”) has issued guidance on the overtime deduction, but not everything is clear. While some employers report this on W-2s, others have not done so for 2025, requiring workers to calculate on their own the deduction using their final 2025 paystub. The law does not require employers to track and report who is eligible and what portion of overtime pay is deductible. This incentivizes taxpayers to game the system and make their deduction claims in essence an opening offer to the IRS, which is so understaffed, inept, and underfunded by the Trump personnel cuts, the likely assumption is that most of these claims won’t ever be challenged.

The Wall Street Journal (“WSJ”) in an April 6, 2026, article on page A3 of the main print edition entitled “Overtime-Tax Claims Top Expectations” reports that many taxpayers are claiming deductions for all their overtime income, not just the extra one-half premium pay.  Also, no surprise, ineligible workers are also claiming the deduction. According to the WSJ, so far this tax season 22 million returns or more than 20% of tax filers have claimed the deduction. The estimate at the time of the enactment was 9% of all returns. Thus, the overtime deduction law is likely to result in more budget busting problems, and greater deficit spending, as tax revenue sags. The WSJ reports that deduction claims based on headcount are likely to exceed twice the anticipated projected numbers used at the time of enactment. “If the doubled claims mean double tax savings, the overtime break could be worth $28 billion to $50 billion annually instead of half that.” WSJ April 6, 2026, at p. A3. This possible price tag is one more nail in the coffin of federal budget restraint. The President promised this during his 2024 campaign, and he delivered on his promise to bust the budget.

I gave my take on what is to come in the blog I posted back in January 2026. https://www.awrcounsel.com/blog/2026/1/14/my-investment-predictions-for-2026 (Prediction # 6). It is inflation from here to eternity. You don’t have to be a fiscal conservative or follower of Milton Friedman to recognize that this is irresponsible, and insolvency is the only other outcome besides price inflation. Plan accordingly.

And while you are at it, why isn’t my phone ringing off the hook from tax lawyers and others who need a FLSA expert witness to support their claims of eligibility for the tax deduction in disputes with the IRS. Some of those taxpayers are going to need a FLSA expert to help defend them from IRS audits and claims for interest and penalties. Maybe that shoe is yet to drop.