No Tax on Overtime Sunset 2028: What Happens When It Expires

No Tax on Overtime Sunset 2028: The Clock Is Running

The overtime income deduction created by the One Big Beautiful Bill Act (OBBBA, P.L. 119-21) is one of the most significant new tax benefits for hourly workers in decades. But it comes with an expiry date stamped on it. Under the statute's sunset provision, the deduction is available for tax years 2025, 2026, 2027, and 2028 only. On January 1, 2029, it disappears — unless Congress acts before then to extend or make it permanent.

That creates a defined four-year window. Workers who earn overtime have until December 31, 2028 to take advantage of a deduction (claimed on Schedule 1-A; it reduces taxable income, not AGI) worth up to $12,500 (single) or $25,000 (married filing jointly) of qualifying FLSA overtime premium pay per year. At a 22% marginal rate, the maximum annual federal income tax saving is $2,750 for a single filer — or $11,000 across the full four-year window.

This guide explains exactly what the sunset means, what happens to overtime workers after it expires, why Congress may or may not act to extend it, and — most importantly — how to maximise the deduction in the remaining years before the window closes.

What the Sunset Provision Actually Says

The overtime income deduction is codified in the One Big Beautiful Bill Act, P.L. 119-21. The sunset provision — found in §70202 of the Act (26 U.S.C. 225(g)) — specifies that the deduction applies to taxable years beginning after December 31, 2024 and before January 1, 2029. In plain English:

• Tax year 2025: Eligible. File your 2025 return (due April 2026) and claim the deduction.
• Tax year 2026: Eligible. File your 2026 return (due April 2027) and claim the deduction.
• Tax year 2027: Eligible. File your 2027 return (due April 2028) and claim the deduction.
• Tax year 2028: Eligible. File your 2028 return (due April 2029) and claim the deduction.
• Tax year 2029 and beyond: No deduction, unless Congress enacts an extension before then.

This structure mirrors how other temporary tax provisions are written — the TCJA rate cuts, bonus depreciation schedules, and the original QBI deduction all followed similar sunset architectures. Congress routinely writes sunsets into legislation to reduce the official 10-year budget cost of a bill, while leaving open the possibility of extension in future legislation.

What Qualifies During the Window

Only FLSA overtime premium pay qualifies — the extra 0.5× component earned for hours beyond 40 in a workweek by non-exempt employees. The regular hourly wage component of overtime hours does not qualify. The deduction is claimed on Schedule 1-A and reduces taxable income (not AGI) without requiring itemisation — it stacks on top of the standard deduction.

Source: One Big Beautiful Bill Act, P.L. 119-21 — Congress.gov

What Happens After December 31, 2028

When the sunset hits, overtime pay reverts to its pre-OBBBA tax treatment: it is ordinary income, fully included in gross income, with no overtime deduction and no special treatment at the federal level.

The Dollar Impact of Expiration

The easiest way to understand the cost of expiration is to look at the maximum deduction scenario for a single filer in the 22% marginal bracket:

• During 2025–2028: $12,500 deduction × 22% = $2,750 saved per year
• After 2028 (no extension): $0 deduction → $2,750 additional federal income tax per year compared to the deduction years

Put differently, a worker who earns at least $12,500 in qualifying overtime premium pay each year and is in the 22% bracket will see their federal income tax bill increase by $2,750 per year starting with their 2029 return — unless Congress acts.

At Different Bracket Levels

• 12% bracket: Maximum saving of $1,500/year → lost to $0 after sunset
• 22% bracket: Maximum saving of $2,750/year → lost to $0 after sunset
• 24% bracket: Maximum saving of $3,000/year → lost to $0 after sunset
• MFJ, 22% bracket, full $25,000: Maximum saving of $5,500/year → lost to $0 after sunset

What Does NOT Change After Sunset

FICA taxes are completely unaffected by the OBBBA sunset — they were never part of the deduction. Social Security (6.2%) and Medicare (1.45%) apply to all overtime pay at all times. The overtime deduction was an income tax deduction only; it never touched payroll taxes.

Your underlying entitlement to FLSA overtime pay also does not change. Workers who are non-exempt under the FLSA still earn time-and-a-half for hours over 40 per week — the deduction's expiry changes your tax treatment of that income, not your right to receive it.

State income taxes are governed independently. Michigan's deduction (tax years 2026–2028) and Georgia's exclusion (repealed after December 31, 2028) are written to end with the federal deduction, and Arizona's subtraction mirrors the federal amount; a state would have to enact its own extension. States without an overtime deduction (like California) are unaffected because their residents never received the benefit in the first place.

The 4-Year Value Window: $11,000 in Total Savings

With four eligible tax years and a maximum annual deduction of $12,500 (single), the total federal income tax value of the overtime deduction over the full window — for a worker who maxes it every year — is:

For a married filing jointly household at the 22% bracket, the picture is even larger:

• $25,000 deduction × 22% = $5,500/year
• Over 4 years: $22,000 in total federal income tax savings

State Savings on Top

In states with a matching deduction (such as Michigan or Arizona), the deduction also reduces state taxable income. For example, in a state with a 5% income tax rate, a full $12,500 deduction saves an additional $625/year in state income tax — $2,500 over four years if it applied to all four (Michigan's covers only 2026–2028), on top of the $11,000 federal figure.

After the Window Closes

The value drops to $0 per year after 2028 if the deduction is not extended. Workers who earn the same overtime in 2029 as they did in 2025–2028 will simply owe more federal (and state, in states with a matching deduction) income tax on that income — with no deduction to offset it.

The QBI Precedent: Could Congress Extend It?

The OBBBA overtime deduction is not the first major tax provision to face a sunset — and the most directly relevant precedent is one the OBBBA itself resolved.

The QBI Deduction History

The Section 199A Qualified Business Income (QBI) deduction was created by the Tax Cuts and Jobs Act of 2017. It allowed pass-through business owners (sole proprietors, S-corp shareholders, partners) to deduct up to 20% of their qualified business income from federal taxable income. Like the overtime deduction, it was written with a sunset: it was originally set to expire on December 31, 2025.

Congress and the tax community spent years debating whether to make it permanent. Ultimately, the OBBBA itself — the same law that created the overtime deduction — made the QBI deduction permanent as part of the same legislative package. A provision that was sunsetting was extended indefinitely before it ever actually expired.

Why the Overtime Deduction Could Be Extended

• Political popularity: The overtime deduction benefits a large, politically sympathetic constituency — hourly workers in construction, manufacturing, healthcare, and logistics. These workers span party lines. Any Congress facing the 2028 election will face pressure to extend a benefit that directly affects many hourly workers.
• Asymmetric optics: Letting a tax cut for hourly workers expire is a difficult political position to defend. The argument "we let tax cuts for working people lapse while keeping tax cuts for corporations" is a powerful attack line.
• Established precedent: The QBI deduction was extended; the TCJA individual rate cuts (also scheduled to expire in 2025) were largely extended by the OBBBA. Congress has a strong track record of extending popular temporary provisions rather than letting them lapse.

Why the Overtime Deduction Might NOT Be Extended

• Budget constraints: Making a $12,500 deduction for all overtime workers permanent is expensive. If the budget environment in 2027–2028 is tight, the deduction may be reduced, means-tested further, or allowed to expire as a revenue offset for other priorities.
• Structural opposition: Some argue the deduction distorts labor markets by subsidising overtime over base employment. Opponents may push for non-renewal.
• Legislative gridlock: Even provisions with broad support can fail to get extended if Congress cannot agree on a broader tax package.

The Planning Implication

Do not build your financial plan on the assumption that the deduction will be extended. Treat 2025–2028 as a certain window and 2029+ as uncertain. Use the certain window aggressively (see the Maximisation section below), and plan conservatively for 2029 and beyond.

Political Landscape and Financial Planning Uncertainty

The sunset creates a specific type of financial planning problem: a known benefit with an unknown future. Workers, employers, and financial planners must make decisions — about overtime hours, retirement contributions, tax strategies, and income timing — without knowing whether the benefit will persist.

What Workers Should NOT Do

• Do not decline overtime in 2025–2028 planning to earn more later — the deduction is available now, and 2029+ is uncertain. Earning and deducting overtime premium now locks in the tax saving.
• Do not assume state benefits will extend independently — even if Congress extends the federal deduction, your state legislature must separately act to extend a state deduction that is written to end after 2028. Never assume state savings are guaranteed.
• Do not plan major financial decisions (home purchases, large deductions, retirement account conversions) around a 2029+ extension that has not been enacted — model both scenarios.

What Workers SHOULD Do

• Take all available overtime in 2025–2028. The deduction is certain in these years. Every hour of overtime premium that fits within the $12,500 cap generates a guaranteed tax saving.
• Verify your state's status annually. States can change their laws at any time, and the OBBBA sunset itself may trigger state legislative responses. Do not assume your state's position from 2025 holds in 2026 or later.
• Model 2029 under the assumption of no extension. Budget for the additional tax cost. If the deduction is extended, you have upside; if not, you are not surprised.
• Consider retirement contributions to stay below phase-out thresholds. If your income is approaching $150,000 (single) or $300,000 (MFJ), pre-tax 401(k) or traditional IRA contributions can reduce AGI and restore $0.10 of deduction for every $1 of MAGI removed while it is available.

State Conformity Risk at Sunset

State overtime deductions that are written to end after tax year 2028 (Michigan's deduction; Georgia's exclusion) or that mirror the federal amount (Arizona's subtraction) will stop when the federal deduction expires unless the state legislature acts. For workers in those states with meaningful state income tax rates, this means a double hit at sunset: losing both the federal and state-level benefits simultaneously. This is an additional reason not to count on state savings continuing past 2028.

How to Maximise the Deduction in the Remaining Years

With a defined window of four tax years (2025–2028), the strategic priority is to extract the maximum possible value from the deduction while it is certain. Here is a systematic approach.

1. Take All Available Overtime in 2025–2028

The most direct maximisation strategy is also the simplest: log overtime hours. Every dollar of FLSA overtime premium you earn within the $12,500 annual cap (single) or $25,000 (MFJ) generates a guaranteed federal income tax deduction. Workers with the flexibility to pick up shifts, accept voluntary overtime, or schedule projects for overtime-eligible periods should do so during this window rather than after it.

2. Manage AGI to Stay Below Phase-Out Thresholds

The deduction is reduced by $100 for each $1,000 of modified AGI above $150,000 (single) or $300,000 (MFJ). Workers approaching these thresholds can preserve the full deduction by increasing pre-tax retirement contributions:

• 401(k) pre-tax contributions: Up to $24,500 in 2026 ($32,500 if age 50+) reduce AGI dollar-for-dollar. A worker at $158,000 AGI who contributes $8,000 pre-tax drops below the $150,000 threshold and keeps the full deduction.
• Traditional IRA contributions: Up to $7,500 ($8,600 if 50+) reduce AGI if you are eligible for a deductible contribution.
• HSA contributions: Up to $4,400 (self-only) or $8,750 (family) in 2026 are above-the-line deductions that reduce AGI.

3. Coordinate with Tips Deduction (If Applicable)

The OBBBA also introduced a deduction for qualifying tip income (for tipped workers in eligible industries). Workers who earn both overtime premium and tips should coordinate both deductions — each has its own cap and applies separately. Total deductible income from both provisions can be significantly larger than either alone. See our No Tax on Tips guide for details.

4. Model the S-Corp Election Question Carefully

Self-employed individuals and small business owners who pay themselves salary may ask whether structuring compensation as FLSA overtime (by working as an employee through their own S-corp) could capture the overtime deduction. The answer depends heavily on the specific facts — FLSA rules, reasonable compensation requirements, and the interaction with the QBI deduction (now permanent). Consult a CPA before attempting this structure, as the IRS scrutinises S-corp compensation arrangements. For most standard employees, this is not relevant — the deduction applies automatically to FLSA overtime premium on their W-2.

5. File Accurate Withholding

Because the overtime deduction reduces taxable income, workers who earn significant overtime may be over-withheld during 2025–2028 if their employer does not adjust withholding for the deduction. Consider filing a revised Form W-4 to reflect the deduction and avoid an unnecessarily large refund (which is an interest-free loan to the IRS). Conversely, ensure you do not under-withhold if your overtime income is variable.

6. Document Overtime Premium Separately

The deduction applies to the overtime premium only — the extra 0.5× component — not to the regular hourly rate paid on overtime hours. Ensure your pay stubs clearly separate regular pay and overtime premium. If your employer does not break this out, use the IRS worksheets (or our calculator) to compute the qualifying amount accurately.