No Tax on Overtime Bill: OBBBA Explained
The One Big Beautiful Bill Act
The One Big Beautiful Bill Act (OBBBA), enacted as Public Law 119-21, was signed on July 4, 2025. It is a comprehensive tax and spending bill that includes several new federal tax deductions for working Americans. The provisions relevant to this site are the deductions for qualified overtime compensation and qualified tips.
What the Law Covers
The OBBBA includes three key tax deductions for workers:
- Overtime deduction (§70202) — Deduction for qualified overtime compensation — the 0.5x premium for FLSA §7 covered employees. Codified as IRC §225. Caps: $12,500 single/HoH, $25,000 MFJ. Phaseout starts at $150K/$300K.
- Tips deduction (§70201) — Deduction for qualified tip income up to $25,000 per year. Similar phaseout thresholds ($150K single/HoH, $300K MFJ). Codified as IRC §224.
- Senior citizens — Additional deductions for seniors (separate provision).
| Provision | IRC Section | OBBBA Section | Annual Cap | Phaseout Start |
|---|---|---|---|---|
| Overtime | §225 | §70202 | $12,500 / $25,000 | $150K / $300K |
| Tips | §224 | §70201 | $25,000 | $150K / $300K |
Overtime Deduction Details (IRC §225)
The overtime provision creates a new section 225 in the Internal Revenue Code. Key details:
- Only the overtime premium (0.5x hourly rate) is deductible, not total OT pay
- Must be in FLSA §7 covered employment
- Above-the-line deduction on Schedule 1
- Does not reduce FICA taxes
- Effective for tax years 2025-2028
Source: IRS FAQ — Qualified Overtime Compensation
Tips Deduction Details (IRC §224)
The tips provision creates a new section 224 in the Internal Revenue Code. Key details:
- Deduction for qualified tip income
- Cap: $25,000 per year (all filing statuses)
- Same phaseout thresholds as overtime: $150K single/HoH, $300K MFJ
- Must be in a tipped occupation
- Effective for tax years 2025-2028
How These Deductions Interact
The overtime and tips deductions are separate. A worker who earns both overtime and tips can potentially claim both deductions, subject to their respective caps. The phaseout thresholds are the same for both provisions.
Frequently Asked Questions
What is the One Big Beautiful Bill Act?
The OBBBA (P.L. 119-21) is a comprehensive federal tax and spending law signed on July 4, 2025. It includes new tax deductions for overtime, tips, and seniors.
What is P.L. 119-21?
P.L. 119-21 is the public law number for the One Big Beautiful Bill Act, the law that created the No Tax on Overtime and No Tax on Tips deductions.
Can I claim both overtime and tips deductions?
Yes, if you qualify for both. They are separate deductions with separate caps. The overtime cap is $12,500/$25,000 and the tips cap is $25,000.
Does the OBBBA apply to state taxes?
No. The overtime and tips deductions are federal only. They reduce federal income tax but do not affect state income taxes.
How long do the OBBBA deductions last?
The overtime and tips deductions are effective for tax years 2025 through 2028. They expire after 2028 unless Congress extends the provision.