The OBBBA overtime deduction is reduced by $100 for each $1,000 of modified AGI above $150,000 (single filers) or $300,000 (MFJ). It is fully gone at $275,000 single or $550,000 MFJ. At $175,000 MAGI (single), you lose $2,500 — from $12,500 to $10,000.
At a glance
Key Facts
Phase-Out Range: $150,000 — $275,000 (Single)
Single filers begin losing the overtime deduction when modified AGI exceeds $150,000. The statute reduces the deduction by $100 for each $1,000 of MAGI above $150,000 (10 cents per dollar), so a full $12,500 deduction is completely phased out at $275,000 MAGI ($150,000 + $12,500 ÷ 10%). At $175,000 MAGI you are $25,000 over the threshold — losing $2,500 of the deduction, leaving $10,000 remaining.
Phase-Out Range: $300,000 — $550,000 (MFJ)
Married filing jointly filers begin losing the overtime deduction at $300,000 MAGI, and a full $25,000 deduction is fully phased out at $550,000 MAGI. The MFJ deduction cap is $25,000 and the reduction is $100 for each $1,000 of MAGI above $300,000 (10 cents per dollar). At $350,000 MAGI, the MFJ deduction is reduced by $5,000 — from $25,000 to $20,000.
Most Overtime Workers Are Unaffected
Whether the phase-out touches you depends only on your modified AGI: a single filer at or below $150,000 (or a joint filer at or below $300,000) keeps the full deduction. The phase-out mainly affects higher earners such as managers and supervisors, or dual-income households whose combined MAGI is above the threshold.
Phase-Out Calculation Formula
Single filer formula (full-cap deduction): Reduced deduction = $12,500 − $100 × ((MAGI − $150,000) ÷ $1,000). If MAGI = $160,000: $12,500 − $100 × 10 = $11,500. If MAGI = $180,000: $12,500 − $100 × 30 = $9,500. If MAGI = $275,000 or above: $0. MFJ formula: Reduced deduction = $25,000 − $100 × ((MAGI − $300,000) ÷ $1,000). The reduction applies to the deduction after the cap (the smaller of your overtime premium and the cap); examples use whole $1,000s of MAGI.
Phase-Out Uses MAGI, Not Just Gross Income
The phase-out is based on modified AGI (MAGI), which for most workers is the same as AGI. MAGI here means AGI plus any income excluded under sections 911, 931 or 933 (mainly the foreign earned income exclusion). AGI is already net of above-the-line adjustments such as traditional IRA, HSA and student loan interest deductions, and includes all wages, tips, and overtime pay. The tips and overtime deductions themselves are claimed on Schedule 1-A and reduce taxable income, not AGI, so claiming one does not lower the MAGI used for the other's phase-out.
Introduction
The Overtime Deduction Phase-Out: Who Is Affected
The OBBBA overtime deduction allows qualifying workers to deduct up to $12,500 (single filers) or $25,000 (married filing jointly) of qualified overtime premium from federal taxable income (on Schedule 1-A; it does not reduce AGI) — but the deduction is not available at all income levels. It phases out starting at $150,000 modified AGI (single) or $300,000 (MFJ), and is completely eliminated at $275,000 (single) or $550,000 (MFJ). For most overtime workers — manufacturing employees, nurses, construction workers, police officers — this phase-out is largely irrelevant if their modified AGI stays below the threshold. But for higher-earning workers, understanding the mechanics helps with accurate tax planning.
Section 01
Step-by-Step Phase-Out Calculation
Here is how to calculate your actual overtime deduction if your income is in the phase-out range.
Single Filer Phase-Out
1. Determine your qualified overtime premium (the FLSA overtime pay above your regular rate; cap at $12,500). 2. Calculate your MAGI (AGI plus any income excluded under sections 911, 931 or 933; traditional 401(k) deferrals, HSA contributions and IRA deductions already reduce AGI, but the tips and overtime deductions do not). 3. If MAGI is $150,000 or below: full deduction applies (up to $12,500). 4. If MAGI is $275,000 or above: deduction is $0 (for a full-cap deduction). 5. If MAGI is between $150,000 and $275,000: Reduction amount = $100 × ((MAGI − $150,000) ÷ $1,000) = 0.10 × (MAGI − $150,000). Your deduction = the smaller of your premium and $12,500, minus the reduction amount (not below zero).
Worked Example: $165,000 MAGI (Single)
MAGI: $165,000. Phase-out trigger: $150,000. Excess: $15,000. Reduction: $100 × 15 = $1,500. Available overtime deduction (for a worker whose overtime premium is at least $12,500): $12,500 − $1,500 = $11,000. Federal savings at the 24% bracket (taxable income $165,000 − $16,100 − $11,000 = $137,900): $11,000 × 24% = $2,640.
Why the Tips Deduction Does Not Change the OT Phase-Out
The tips deduction and the overtime deduction are both claimed on Schedule 1-A and reduce taxable income, not AGI. So claiming a tips deduction does not lower the MAGI used for the overtime phase-out. What does lower MAGI: traditional 401(k) deferrals, HSA contributions and deductible IRA contributions. Example: MAGI of $160,000 gives a maximum overtime deduction of $11,500. A $10,000 traditional 401(k) deferral lowers MAGI to $150,000, restoring the full $12,500 — $0.10 of deduction restored per $1 of MAGI reduced (worth about 2.4 cents per dollar at a 24% bracket). That is arithmetic, not a guaranteed saving: the 401(k) deferral itself is a separate decision.
Section 02
Comparing Tips and OT Phase-Outs
The tips and overtime deductions have identical phase-out start thresholds and the same $100-per-$1,000 reduction — but different maximum deduction amounts.
Same Thresholds, Different Caps
Both deductions start to phase out at $150,000 (single) or $300,000 (MFJ) of modified AGI, reduced by $100 for each $1,000 above. But the tips deduction cap is $25,000 (single and MFJ), while the overtime deduction cap is $12,500 (single) or $25,000 (MFJ). So a full tips deduction is gone at $400,000 single or $550,000 joint, while a full overtime deduction is gone at $275,000 single or $550,000 joint. For single filers the tips cap is twice the overtime cap; for MFJ filers both caps are $25,000.
Phase-Out Is Calculated Separately
Each deduction is phased out independently. If you are in the phase-out range for both, each is reduced separately by $100 per $1,000 of MAGI over the threshold — not a combined phase-out that reduces both together. Because neither deduction changes AGI, the order in which you claim them does not matter: both are computed from the same MAGI.
Section 03
Who Is Most Likely to Be in the Phase-Out Range
Very few hourly overtime workers hit the $150,000 threshold, but some scenarios do bring workers into the range.
Scenarios That Might Trigger Phase-Out
A nurse earning $95,000 base salary + $30,000 in overtime = $125,000. Below the threshold — full deduction applies. A construction supervisor earning $110,000 + $45,000 overtime = $155,000. Slightly above the threshold — the maximum deduction is reduced by $500 (from $12,500 to $12,000). A married couple where both work and earn overtime: combined income of $320,000 (above MFJ $300,000 threshold). A police officer in a high-cost city with significant overtime earning $185,000 total. These are edge cases for most workers, but real situations for some.
Planning Options in the Phase-Out Range
Workers in the phase-out range can consider: maximizing traditional 401(k) contributions to reduce MAGI (they reduce AGI dollar-for-dollar, potentially pulling MAGI below the $150,000 threshold); HSA contributions (also reduce MAGI). Each $1 of MAGI you remove restores $0.10 of overtime deduction, so weigh that against the tax effect of the contribution itself. Consult a tax professional if your income is near the phase-out range.
FAQ
Frequently Asked Questions
Q
At what income does the overtime deduction phase out?
The overtime deduction phases out starting at $150,000 MAGI (single filers) or $300,000 (MFJ), and a full-cap deduction is completely eliminated at $275,000 (single) or $550,000 (MFJ). The reduction is linear: for every $1,000 above the start threshold, you lose $100 of deduction ($0.10 per $1). Filers at or below the threshold keep the full deduction.
Does the tips deduction affect the overtime deduction phase-out?
No. The tips deduction is claimed on Schedule 1-A and reduces taxable income, not AGI, so it does not lower the modified AGI used for the overtime phase-out (and vice versa). Only choices that reduce AGI itself — such as traditional 401(k) deferrals, HSA contributions or deductible IRA contributions — change where you land in the phase-out.
Q
Do nurses and construction workers typically hit the phase-out?
It depends only on modified AGI, not on the occupation. A single nurse or construction worker whose MAGI is at or below $150,000 keeps the full deduction. The phase-out primarily affects higher-earning workers, supervisors, or dual-income couples approaching $300,000 combined income.
Q
When does the overtime deduction phase-out expire?
The entire OBBBA overtime deduction — including the phase-out structure — expires after the 2028 tax year. If Congress does not act to extend the provision, overtime pay becomes fully taxable again starting with tax year 2029.
Disclaimer:For informational purposes only. This is not tax advice. Consult a qualified tax professional for your specific situation.