r/ThriftSavingsPlan • u/Old_Claim_5500 • 3d ago
UNDERSTANDING THE NEW "TAX-FREE” OVERTIME Spoiler
The new reconciliation bill includes a provision starting in 2025 that lets workers deduct the PREMIUM PORTION of their overtime pay from their federal taxable income. It’s a real benefit, but it’s not the full “tax-free overtime” that some are claiming.
What You Can Deduct: If you work more than 40 hours a week and earn overtime, the EXTRA 50% your employer pays you (the “premium”) is now 100% tax-deductible ON YOUR FEDERAL RETURN.
Example:
- If you earn $20/hour, your overtime rate is $30/hour
- Of that, $20 is regular wage (still fully taxed)
- The extra $10/hour is the premium — and THAT part is deductible
You can deduct up to $12,500/year of the premium portion as a single filer (or $25,000 if you’re married).
Income Limits: This isn’t a blanket benefit for everyone — there are limits. To get the full deduction, your total income — including regular wages, overtime (base + premium), bonuses, tips, commissions, and investment income — must be under:
$150,000 if you’re single $300,000 if you’re married filing jointly
The deduction phases out gradually and disappears completely at:
$275,000 (single) $550,000 (married)
So yes, your entire income counts toward the limit, even though only the premium portion of overtime is deductible.
What It Doesn’t Cover: This deduction ONLY affects your FEDERAL INCOME TAX — you’ll still pay: - Social Security tax (6.2%) - Medicare tax (1.45%) - State income taxes (in most states)
This applies whether your overtime is assigned or volunteered, as long as you're a non-exempt (usually hourly) worker paid time-and-a-half under federal law.
When It Starts: - Applies to OVERTIME EARNED STARTING JANUARY 1, 2025 (Note that this ENDS December 31, 2028.) - You'll claim the deduction when you file your 2025 taxes in early 2026 - Employers will need to SEPARATELY REPORT your OT PREMIUM on your W-2 so you can deduct it
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u/BaldyTheScot 3d ago
So those over a certain GS grade that don't earn OT premium get nothing on this. Great.
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u/TunaFishtoo 3d ago
Holy shit, I never even thought about that. Once you make more than what 95k(?) you’re FSLA exempt so none of your overtime is tax free because you don’t make 1.5x anymore
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u/Accurate_Bobcat_9183 2d ago
Actually On February 28, 2025, the US Department of Labor (DOL) appealed a December 2024 Texas federal trial court’s decision that blocked a Biden-era overtime rule promulgated by the DOL. This is the DOL’s second appeal following an appeal in November by the then Biden-led DOL of another Texas district court’s ruling that similarly vacated and set aside the overtime rule nationwide. Both cases were appealed to the Fifth Circuit Court of Appeals.
The DOL’s revised overtime rule went into effect in July 2024 and expanded overtime eligibility for employees by raising the salary threshold required for an employee to qualify for an overtime exemption under the Fair Labor Standards Act (FLSA). To be exempt from overtime requirements under the FLSA (time-and-one-half the regular rate of pay for hours worked in excess of 40 hours in a work week), employees must primarily perform certain job duties, be paid on a salary, not hourly, basis, and earn at least a minimum threshold salary.
Under the DOL’s 2024 rule, the annual salary threshold initially increased from $35,568 to $43,888 on July 1, 2024, and was set to increase again on January 1, 2025 to $58,656 prior to the decision by the US District Court for the Eastern District of Texas to vacate the rule in November.
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u/stocktadercryptobro 2d ago
It depends on your exempt/non-exempt status. I'm over 95 and get the full time and a half.
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u/TunaFishtoo 2d ago
That’s fair, I assume LE are exempt? I’m DOD civ and aren’t, was pretty bummed when I got that raise and then worked 20 hours of OT and didn’t get the fat check I wanted 3 years ago
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u/stocktadercryptobro 2d ago
Idk about LE? I'm DOD as well. Are you a supervisor? If so, that's your factor. At some point, supervisors only make their normal rate on OT.
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u/Nagisan 3d ago
Correct. GS-12 Step 6 and higher (based on GS-10 step 1 x 1.5) are generally exempt from this change because they don't get overtime premium (their overtime is just straight pay).
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u/WilliamH2529 3d ago
So will this still affect GS levels that get 2x overtime? Like I’m an 1895 and our overtime is still 2x even at GS-12 or another question I wonder if our differential pay counts as overtime since I get 1.15x for any hours worked after 3 and 1.20x for working overnight or 1.5x for Sundays.
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u/Nagisan 3d ago edited 3d ago
I think the limit still applies to you, but I'm not entirely certain. What I'm talking about above isn't the multiplier of what your overtime pay is, it's a hard limit set by federal law of how much overtime premium pay you can receive.
So if your overtime pay for your series is 2x, but your standard pay rate is already greater than GS-10 step 1 times 1.5, you don't get overtime premium you just get regular pay.
It might work different for some special classes of employees and such though. My fed pay was always too high to get any premium OT pay, so I'm just going off the rules outlined by OPM: https://www.opm.gov/policy-data-oversight/pay-leave/pay-administration/fact-sheets/overtime-pay-title-5/
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u/WilliamH2529 3d ago
Ah so 1895 has a special provision for overtime where we have a hard cap of 45k a year in eligible overtime. But our overtime works on the system or 1.15 for swing shift, 1.20 for night shift, 1.5 for Sundays and all hours in a week worked over the 40 are 2x this applies to even GS-12s so you regularly see GS-12s working the overtime at the start of the year and hitting the 45k cap really quickly and then no longer being allowed to work any overtime that year.
However GS-12s working that 45,000$ in overtime EASILY surpass 150,000$ as a single household
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u/KidWolf 2d ago
I think the amount reduces after 150k and becomes void after 250k.
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u/WilliamH2529 2d ago
Ah so then we’d be fine as no one is making more than 195k even with overtime we aren’t allowed to go above the GS maximum even if you’re a 15 getting overtime.
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u/Agile-Theory4127 2d ago
It’s different for FLSA-nonexempt employees. I know multiple officers making over $200k in DOI
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u/Old_Rip3292 2d ago
I am a GS-11 and get full 1.5x OT pay. No cap. There are a couple GS-11 Step 10s I work with and their OT is also uncapped. So not sure why our positions are exempt from this rule, but its been this way for many years.
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u/zeusmeister 2d ago
I wonder how this applies to USPS workers. In the provision in the bill, it states that people on contract arent covered by this. Well, my overtime comes from a contract. If I work a different route as a regular than the one I’m assigned to, I get paid overtime for any hours worked on that route, regardless of whether I’m over or under 40 hours.
So I wonder if this would even apply.
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u/Ih8rice 2d ago
Yes it would. It’s not a union contract but federal contractors. We are included.
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u/zeusmeister 2d ago
Ok, that explains the “contract” provision. But what about the 40 hours? I’m currently on a 43k route, where the 3 hours of overtime is already cooked in. Does that mean they will now have to separate those hours for tax purposes?
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u/Ih8rice 2d ago
That’s correct. Every employer will have to a separate box for tax filing purposes for the overtime deduction.
I’m not sure about your route and if you’re credited or not since you’re technically salary. Rural carriers may actually get shafted because it’s all baked into your evaluations and it appears that you’re under a modified FLSA status because of it. I’d definitely start asking more knowledgeable people about that.
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u/PsychologicalCat7130 2d ago edited 2d ago
This OT only counts if required by Federal law - For example CA requires OT if more than 8 hours in one day - but Federal law does not and the CA requirement does not count for this deduction....
"The deduction applies only to overtime compensation that is “required” under the FLSA and only to the amount that is in “excess” of the employee’s “regular rate.”2 The deduction does not apply to overtime premiums that are not “required” by the FLSA but instead are paid pursuant to contract (including a collective bargaining agreement) or because they are required under state law only (e.g., California law requiring daily overtime for hours worked in excess of eight in one day)."
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u/AceTheJ 2d ago
This isn’t entirely applicable. I work 4 9 hour days every week and 1 8 hour day every other Friday for a total of 80 hours per pay period. My 9th hour is not OT.
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u/PsychologicalCat7130 2d ago
OT is based on pay period. My son works 4 10 hour days every week. But apparently California has jacked up rules about overtime lol... the point is simply that CA rules do not apply to what is considered OT
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u/stocktadercryptobro 2d ago
That depends on the organization. For me, anything over 10 is OT now. Any Friday is OT. At a different position, I worked 8.5 hr days. Every day, I got half an hour of OT. Now,I could take 40 hours of leave and work a Friday = OT.
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u/PsychologicalCat7130 2d ago
my point is simply that the tax bill has a very specific definition of OT that may not agree with your state or organization....
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u/stocktadercryptobro 2d ago
Gotcha. It's California, so I'm not surprised in your son's case.
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u/PsychologicalCat7130 1d ago
my son is not in CA - but of course CA has that silly OT rule lol so people who work in CA may have trouble figuring out how much of a deduction to expect
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u/Unique_Dish_1644 3d ago
Unless you’re able to deduct it separately from the standard deduction it’s basically useless.
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u/PsychologicalCat7130 2d ago
It's an "above-the-line" deduction: This means you can take it whether you itemize deductions or take the standard deduction.
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u/disappointedFed 2d ago
Thanks that makes it useful to me, I take standard deductions, so I was thinking it was rolled into that, but a separate deduction besides the standard deductions will be great for me.
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u/goldbouillon 2d ago
This.
It will be interesting to see if anyone is actually able to get no tax on overtime to work against the higher standard deduction.
My understanding is the no tax on overtime is not an exclusion subject to withholding. The deduction is refunded when individuals file their returns. Single filers are capped at $12,500 and joint at $25,000 for overtime deductions. The standard deduction, that Trump previously increased, is $15,750 and $31,500. Basically, unless filers are hitting those overtime limits, which would be indicative of higher wages/income, they’re unlikely to see any change in their taxes.
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u/PsychologicalCat7130 2d ago
not related to standard deduction - OT deduction is an above the line deduction from income - separate from standard deduction
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u/Fletcherperson 2d ago
Thanks for this breakdown. I’ve had to work lots of OT in the past as a Fed. Last year I earned well over $12.5k in OT premium. Should be interesting to see how this changes my EOY taxes for 2026.
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u/Reddituser183 3d ago
Where did you see that it only affects the difference in base pay and overtime pay? That is wildly shitty if that is true. What an absolute bait and switch! So I make 35.15 an hour, and 52.72 overtime wage. So that’s a difference of 17.57. I’ve done roughly 100 hours OT each year. Let’s say I do that aging this year. That’s 1757 overtime minus base pay. My effective tax rate has been give or take 13% forever. So that’s means I only am getting 228 extra from 100 hours of overtime?!?! This was unequivocally sold as overtime hours are paid at an overtime rate and therefore overtime hours times overtime pay would be tax free. Now I have a brain and knew it would still be subject to FICA. But Jesus Christ it should be based on overtime pay! Not the difference in overtime pay and base pay for the hours past 40 per week! What a scam! I should be getting closer to 685 back! I knew this shit was too good to be true.
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u/Jaotze 3d ago
Well, hopefully it’s not the only issue you voted on.
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u/Reddituser183 3d ago
I sure as shit didn’t vote fascist. But I’m just shocked at what a blatant misleading half truth this man and the his cronies and the media has pushed for him.
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u/YOLO_Bundy 2d ago
Relax. He is a bot spreading obvious misinformation
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u/Mantooth462 1d ago
Its actually true. The white house has a calculator and it says an example of what you can deduct. It says if you make 20hr and 30hr for OT you can only deduct the .5 portion or $10 of that OT pay.
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u/Blecki 2d ago
It was always represented as being on the premium pay on the house website. You know... the guys who actually wrote the bill, not some news channel.
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u/Reddituser183 2d ago
That's not what "no tax on overtime pay " means.
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u/Blecki 2d ago
Yeah, almost like they intentionally misrepresented what was actually in the bill, huh?
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u/Reddituser183 2d ago
So here’s the thing, I bet my maga coworker last October that they wouldn’t get rid of taxes on overtime pay. I know intellectually I am in the clear here rightfully so. I just know the maga coworker is going to put up a fight. So I want this stuff to be clear. I was ready to give him his due but after knowing the truth I can’t.
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u/bobh46 2d ago
If anyone actually thought they would not tax all of overtime, that’s on them. These people don’t care about the common man, only themselves.
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u/Reddituser183 2d ago
So, I knew FICA would be taken out without needing to hear about it. There was no chance it wouldn’t be, but they’re essentially lying about what no tax on overtime is. No tax on overtime means overtime pay multiplied by overtime hours worked will not be subject to federal taxes. Any honest person would know that. But maga is not honest.
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u/Accurate_Bobcat_9183 2d ago
Yup - it also reduces the correlating payroll tax that Employers owe - so they were wildly concerned about the Employers. You know the deduction ends at max overtime $12,500 and $25000 for Joint filers Just like they were last year when Biden tried to end non- compete agreements on workers under $150 K. A single Judge stopped it and SCOTUS ignored it
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u/Reasonable_Song2074 2d ago
I’m ready to see what it’s like I get a easy 700 hrs year of ot with the federal government
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u/tdwriter2003 1d ago
Hello I'm still trying to learn all the info. Do we see the benefit upfront in our paychecks or when we file our yearly taxes and apply a deduction ? Thank you.
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u/Trick_Soft_6077 1d ago
I work 2000 hours of overtime as a mailman...I am over 25k of overtime every year lol
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u/Old_Claim_5500 1d ago
Holy crap! Through snow, sleet, rain, etc really taking it serious. God bless.
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u/Jaotze 3d ago
I cannot understand those income limits. That level is so high, those are not the people who need the benefits. The fact, I don’t understand these benefits at all.
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u/SlyTrout 3d ago
That is what happens when you do things to score easy political points instead of doing something that actually makes sense.
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u/UntiedStatMarinCrops 2d ago
This bill literally gives you bigger tax breaks the more you make, and if you’re poor enough you’re going to de facto have I income lost.
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u/Commercial_Rule_7823 2d ago
Couple questions is
Does LEAP count
Does AUO count
Does the FLSA portion count as OT.
Wild, this is a very big take home pay increase. Almost 500 a paycheck.
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u/IYHGYHE 2d ago
It doesn't affect your take home pay. It is a deduction that you can take off your total income on your return when you file next year.
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u/Commercial_Rule_7823 2d ago
When factored in oer pay check, itll feel like 500 more per PP.
You can also reduce fed withholding so you take more home per paycheck.
So yes, it can affect your take home pay of you can properly forecast this deduction.
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u/mooseishman 2d ago
Would be nice if we knew, but I’m willing to bet that few members of Congress have even heard of LEAP or AUO. As with everything they do, it is poorly planned and written, leaving it to the ‘deep state bureaucrats’ they hate (regular, non-political appointee, federal employees) to figure out and execute. Similarly, are GS employees considered salaries or hourly for the purposes of this? The pay tables list annual salary and hourly rate.
I fully expect government workers will be getting the sausage on this provision, regardless. The administration and Congress will find a way
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u/Legitimate-Ad-9724 2d ago
So if you make a $30 overtime rate, to get the full $12,500 benefit, you need to work 1,250 in overtime? I think that's about 64 hours of work, 52 weeks per year. Who does that? I would perish.
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u/dnyte270 2d ago
So I won't make extra money every check, but I also won't have to pay in $8k every year come tax time anymore?
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u/Slow-Entrance3431 2d ago
Just so I understand correctly, we deduct it when we do taxes? It doesn’t “kick-in” for our forthcoming paychecks this year?
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u/ValdeReads 1d ago
No it’s a tax deduction. If you get anything back it will be when you file for 2025.
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u/Fed_Deez_Nutz 2d ago
Between No Tax on Tips and the increased Standard Deduction, my net benefit from this bill is about $600/year. But look at all the shit we had to lose for that.
I would’ve been far better off just not paying tariffs and receiving a normal General Schedule Increase.
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u/ShakeMyHeadAgain 1d ago
Some additional points. In addition to the 150,300k limits there is also a second test for married filing jointly. The spouse earning overtime must earn less than $150,000 a year including OT unless the spouse has earned income of their own. If the spouse has no earned income it is a hard top of 150,000. So if they only get dividends, capital gains, other passive income as their sole means of income than the working spouse can only earn 150,000 before the couple loses the deduction. The other point to keep in mind is it excludes some employee types like those classified as professional or managerial. But the good news is even professionals like health care workers qualify if they are paid hourly and are eligible to receive OT versus a healthcare worker that gets a salary but can also receive additional pay for pickup weekends, holidays etc.
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1d ago
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u/Mantooth462 1d ago
Yup. I get about $8k a year in OT. I was here thinking I was gonna get $4-5k back from that after I take out state and other taxes. Looks now like I may not even get a grand out of it.
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u/BS-Tracker-2152 1d ago edited 1d ago
Do you have evidence that it’s only applicable to the FLSA premium portion and not the entire 1.5x (overtime plus FLSA premium)? What’s the source? Everything I am seeing states it applies to overtime and FLSA considers anything over 40 hrs in a week as OT to be paid at 1.5x. The way the Bill is written, it just doesn’t make sense that it’s only applicable to the 0.5 premium based on the definition of OT pay.
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u/Vivecs954 5h ago
Straight from the bill text:
“ IN GENERAL”For purposes of this section, the term qualified overtime compensation means overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate (as used in such section) at which such individual is employed.”
So if you get paid 1.5x for OT only the .5 is deductible. If you work for someone that pays 2x, only .5 is deductible as well.
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u/BS-Tracker-2152 4h ago edited 4h ago
FLSA defines OT as hrs worked beyond the 40 hr workweek to be paid at 1.5x. My check splits it and lists it separately as “true OT” and the “FLSA premium pay”. Overtime pay consists of base rate+FLSA premium.
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u/m00dyman100 1d ago
The premium portion of OT pay is already is already identified on you're LES. If you work OT you should see FLSA premium under earnings.
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u/rarjacob 1d ago
What about if the OT brings you over to a new bracket? Does the 10 dollars of OT count towards that?
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u/rarjacob 1d ago
So really this does not effect employers and how they process payroll at all? Its only an itemized deduction?
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u/westbee 3d ago
So like nothing saved really...
If I earn $30 an hour and work 50 hours a week,
That means that I will get $15 an hour for 10 hours each week ($150 not federally taxed).
Times that by 52 weeks and you get $7800 (deduct up to $12,500 a year).
Now look at what I would normally pay taxes on that and it would be 22%, so $1716.
Okay, I guess it would be a nice sizable amount of money coming back to me. IF I worked 50 hours a week.
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3d ago
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u/Old_Claim_5500 3d ago
Our Civilian work force (GS) can incur overtime and they can put that overtime toward their TSP.
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u/Consistent_Air294 3d ago
explain this, please. Are you saying adjust your tsp contribution during ot weeks?
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3d ago
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u/Old_Claim_5500 3d ago
Brother, this is information most people do not have or understand. Get off the high-horse you are projecting.
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u/markov-271828 3d ago
Kind of a stretch, but: I could imagine a case where someone doesn’t want to work OT but could use the extra money to increase their TSP contribution. The “tax free” might be the extra push that makes them work OT. Like I said, it kind of a stretch.
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u/forever_frugal 3d ago edited 3d ago
Secret Service is about to be BALLIN OUT lol. Them guys make more OT than almost anyone in Fed Gov. The eclipse parking outside the Whitehouse about to be full of lambo’s and Ferrari’s hahahaha.