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Creates a new individual tax deduction for overtime pay so workers can deduct up to 20% of overtime wages earned from the same employer, subject to income phaseouts and a sunset at the end of 2029. The bill defines overtime using the Fair Labor Standards Act, makes the deduction available to non-itemizers, and requires the Treasury to update withholding rules to reflect the change.
The bill gives many overtime earners an above-the-line, near-term tax break and potentially quicker increases in take-home pay, at the cost of reduced federal revenue, administrative burdens for employers, and uneven, temporary coverage.
Workers who earn overtime can deduct up to 20% of overtime pay as an above-the-line deduction, lowering their taxable income and directly reducing federal income tax liability.
Workers who take the standard deduction (non-itemizers) receive the benefit immediately because the deduction is available above-the-line, so more filers—not just itemizers—see reduced taxable income and improved adjusted gross income.
Workers and employers may see higher take-home pay sooner because the Treasury is required to revise withholding tables so payroll withholding reflects the new deduction.
Many middle- and higher-income households will be excluded because the deduction phases out at modest AGI thresholds, producing uneven benefits and added complexity for filers near the thresholds.
All taxpayers could face indirect costs because the new deduction reduces federal revenue, which may increase the deficit or require offsets such as spending cuts or tax increases elsewhere.
Small businesses and payroll providers must update systems and processes to implement revised withholding and the deduction, creating one-time administrative costs and transition burdens.
Introduced January 20, 2025 by Donald J. Bacon · Last progress January 20, 2025