Understanding the Overtime Pay Exemption Under OBBA

Overview of the One Big Beautiful Bill Act (OBBBA)

Starting January 1, 2025, the One Big Beautiful Bill Act (OBBBA) will introduce a significant change to the taxation of overtime pay for qualifying employees. This act aims at easing the financial burden on workers by allowing them to deduct a specific amount of their overtime earnings from their taxable income. You can save more money to send to your loved ones. As we approach this new law, understanding its provisions will be crucial for everyone.

“No Tax on Overtime”

One of the most important aspects of the OBBA is that individuals can deduct a substantial amount of their overtime pay. Most filers can deduct up to $12,500, while couples filing jointly can deduct up to $25,000. This means that qualifying overtime pay will not only contribute to increased earnings but will also reduce taxable income, potentially leading to lower tax liabilities for many households.

"No Tax on Tips”

• New deduction: Effective for 2025 through 2028, employees and self-employed individuals may deduct qualified tips received in occupations that are listed by the IRS as customarily and regularly receiving tips on or before December 31, 2024, and that are reported on a Form W-2, Form 1099, or other specified statement furnished to the individual or reported directly by the individual on Form 4137.

  • “Qualified tips” are voluntary cash or charged tips received from customers or through tip sharing.

  • Maximum annual deduction is $25,000; for self-employed, deduction may not exceed individual’s net income (without regard to this deduction) from the trade or business in which the tips were earned.

  • Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

“No Tax on Car Loan Interest”

• New deduction: Effective for 2025 through 2028, individuals may deduct interest paid on a loan used to purchase a qualified vehicle, provided the vehicle is purchased for personal use and meets other eligibility criteria. (Lease payments do not qualify.)

  • Maximum annual deduction is $10,000.

  • Deduction phases out for taxpayers with modified adjusted gross income over $100,000 ($200,000 for joint filers).

In summary, the One Big Beautiful Bill Act will introduce meaningful changes to how overtime pay is taxed, allowing eligible employees to benefit financially. By staying informed about the provisions and preparing for the upcoming changes, both employees and employers can navigate the logistics of the new tax landscape effectively.