The One Big Beautiful Bill Act, enacted on July 4, 2025 as Public Law 119-21, introduced a wide range of changes that will impact tax returns for the 2025 tax year and beyond.
Starting in tax year 2025 through 2028, qualified overtime compensation can be entered as a below line deduction. The deduction is limited to $12,500 per taxpayer (maximum of $25,000 on a MFJ return). Qualified overtime compensation is the amount of overtime paid under Federal labor laws in excess of the regular rate. Thus, for an employee earning overtime on a "time and a half" basis, the amount eligible for deduction is the "half".
In order to accommodate this deduction, overtime will be identified separately on the taxpayer’s Form W-2 in a similar fashion to tips. The deduction is calculated on Schedule 1-A Part III.
Deducted income will still be considered earned income for the purposes of the Earned Income Tax Credit and the Child Tax Credit. Additionally, married taxpayers must file a joint return to claim this deduction.
This deduction is gradually phased out for taxpayers with a Modified Adjusted Gross Income (MAGI) over the threshold. (MAGI is the AGI with any foreign-earned income exclusion added back.) The deduction is reduced by $100 for every $1,000 that the MAGI is over the threshold.
The following thresholds are in effect for the 2025 tax year:
- Single, Head of Household - $150,000
- Married Filing Jointly - $300,000
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