What Is No Tax On Overtime Deduction And Where It Is Not Applicable?
What is no tax on overtime deduction and where it is not applicable is a key topic after President Donald Trump signed the One Big Beautiful Bill Act into law on July 4, 2025. The law introduced multiple tax changes, including no federal income tax on overtime payments. The deduction applies up to $12,500 for single filers and $25,000 for married couples. Another provision of the law includes no federal income tax on tips.
In November 2025, several states passed laws to block this federal overtime deduction in their state tax systems. These states said the deduction could reduce their revenue. As a result, residents in these states cannot claim the no tax on overtime deduction at the state level.
No Tax On Overtime: When Does it Start?
The no tax on overtime deduction was signed into law by Trump on July 4, 2025. It applies retroactively to incomes from January 1, 2025. Taxpayers earning overtime in 2025 will see the deduction in the next federal tax filing season. This means the rule is already in effect for most workers who qualify.
How No Tax On Overtime Deduction Works?
The law provides a deduction, not a full exemption. Overtime pay is still taxed, except for the part eligible for deduction. Only the premium portion of overtime—such as the extra pay above regular hours—qualifies. Certain types of overtime, like voluntary or non-FLSA overtime, may not qualify. This deduction reduces federal taxable income but does not eliminate it completely.
US States Where No Tax On Overtime Deduction Does Not Apply
Some US states have blocked the federal overtime deduction to protect state budgets. These states require residents to pay state income tax on overtime income.
Washington
In November 2025, the Washington City Council passed an emergency amendment rejecting the federal no tax on overtime deduction. Residents must report overtime pay and pay state income tax.
New York
New York introduced two changes to state income tax laws. These changes allow the state to ignore the federal deduction for overtime income. Workers in New York will pay state tax on overtime even if they qualify federally.
Illinois
Illinois has not applied the no tax on overtime rule yet. The state is expected to pass new provisions similar to New York to continue taxing overtime income.
Colorado
Colorado will not adopt the federal deduction. Residents must report overtime pay and pay taxes at the state level. The state cited budget reasons for rejecting the federal rule.
FAQs
Q1: How does the federal no tax on overtime deduction work?
The federal rule allows a deduction on eligible overtime pay. Only the premium portion of overtime is deductible. Federal limits are $12,500 for singles and $25,000 for married filers.
Q2: Which states do not apply the federal overtime deduction?
Washington, New York, Illinois, and Colorado reject the federal overtime deduction. Residents in these states must pay state income tax on overtime income, regardless of federal rules.