Make Permanent the Deduction of Overtime Pay from Taxable Income

The One Big Beautiful Bill Act of 2025 created a temporary deduction for some overtime pay, available for tax years 2025 through 2028. It allows taxpayers to deduct the part of overtime compensation that exceeds their standard hourly rate (typically, the “half” of time-and-a-half pay), up to $12,500 for single filers or $25,000 for joint filers. The deduction begins to phase out when modified adjusted gross income exceeds $150,000 for single filers or $300,000 for joint filers.

This option makes the overtime pay deduction permanent. The deduction reduces how much income is subject to tax, and it may also push some taxpayers into lower tax brackets, reducing marginal tax rates on some income. The phaseout raises marginal tax rates for other taxpayers. Overall, the deduction lowers marginal tax rates on income, increasing after-tax returns to work. As a result, hours worked would increase, and economic output would expand.

On a conventional basis, this option would increase the primary deficit by $372.4 billion over the budget window. Long-run GDP and GNP would rise by 0.1 percent. On a dynamic basis, the primary deficit would increase by $238.2 billion from 2027 through 2036, $134.2 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 177.6 percent by 2056.

On average, in 2036, taxpayers would see increases in their after-tax incomes of 0.2 percent. The main beneficiaries would be the middle three quintiles, as the bottom quintile already has little to no tax liability, and the top quintile is limited by the phaseout. On a long-run dynamic basis, taxpayers would see a 0.3 percent increase on average.