The OBBBA overtime deduction phases out linearly from $150,000 to $200,000 AGI (single filers) or $300,000 to $400,000 (MFJ). At $175,000 AGI (single), you lose 50% of the deduction — from $12,500 to $6,250. Above $200,000 single or $400,000 MFJ, the overtime deduction is zero.
At a glance
Key Facts
Phase-Out Range: $150,000 — $200,000 (Single)
Single filers begin losing the overtime deduction when modified AGI exceeds $150,000. The deduction is completely phased out at $200,000 MAGI. The phase-out is linear: for every $1 of MAGI above $150,000, the deduction is reduced by $0.25 (since the phase-out range is $50,000 and the deduction cap is $12,500). At $175,000 MAGI, you have used $25,000 of the phase-out range — losing $6,250 of the deduction, leaving $6,250 remaining.
Phase-Out Range: $300,000 — $400,000 (MFJ)
Married filing jointly filers begin losing the overtime deduction at $300,000 MAGI, and it is fully phased out at $400,000 MAGI. The MFJ phase-out range is $100,000 and the MFJ deduction cap is $25,000. For every $1 of MAGI above $300,000, the MFJ deduction is reduced by $0.25. At $350,000 MAGI (50% through the range), the MFJ deduction is reduced by $12,500 — from $25,000 to $12,500.
Most Overtime Workers Are Unaffected
BLS data shows median wages for the most overtime-heavy occupations: manufacturing production workers ($45,000–$65,000/year), construction workers ($55,000–$80,000), nurses ($75,000–$95,000), police officers ($65,000–$90,000), truck drivers ($55,000–$75,000). Even with significant overtime pay added on top, most of these workers earn well below the $150,000 phase-out threshold. The phase-out primarily affects highly-compensated managers, supervisors, or workers in dual-income households.
The phase-out is based on modified AGI (MAGI), which for most workers is the same as AGI. MAGI typically excludes IRA deductions, student loan interest, and other above-the-line deductions but includes all wages, tips, and overtime pay. The tips deduction itself reduces AGI before the overtime phase-out is calculated — so claiming the tips deduction first can reduce MAGI, which may affect how much of the overtime deduction survives the 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) in overtime compensation from federal 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 above $200,000 (single) or $400,000 (MFJ). For most overtime workers — manufacturing employees, nurses, construction workers, police officers — this phase-out is largely irrelevant because they earn well below $150,000. 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 qualifying overtime pay (cap at $12,500). 2. Calculate your MAGI (start with gross income, subtract above-the-line deductions including the tips deduction if applicable). 3. If MAGI is $150,000 or below: full deduction applies ($12,500). 4. If MAGI is above $200,000: deduction is $0. 5. If MAGI is between $150,000 and $200,000: Reduction amount = ($12,500 / $50,000) × (MAGI — $150,000) = $0.25 × (MAGI — $150,000). Your deduction = $12,500 — reduction amount.
Worked Example: $165,000 MAGI (Single)
MAGI: $165,000. Phase-out trigger: $150,000. Excess: $15,000. Reduction: $0.25 × $15,000 = $3,750. Available overtime deduction: $12,500 — $3,750 = $8,750. If OT pay was $12,500, deductible amount is $8,750. Federal savings at 24% bracket: $8,750 × 24% = $2,100.
How the Tips Deduction Can Help Preserve the OT Deduction
Because the tips deduction reduces AGI before the overtime phase-out is calculated, a worker earning both tips and overtime may benefit from the tips deduction reducing their MAGI into a more favorable phase-out position. Example: MAGI of $160,000 before any OBBBA deductions. Tips deduction of $25,000 reduces MAGI to $135,000 — below the $150,000 threshold. Full overtime deduction of $12,500 now applies (no phase-out). Combined savings: significantly higher than if the overtime deduction were also partially phased out.
Section 02
Comparing Tips and OT Phase-Outs
The tips and overtime deductions have identical phase-out thresholds — but different maximum deduction amounts.
Same Thresholds, Different Caps
Both deductions use $150,000/$300,000 (start) and $200,000/$400,000 (full elimination) as their phase-out ranges. But the tips deduction cap is $25,000 (single and MFJ), while the overtime deduction cap is $12,500 (single) or $25,000 (MFJ). This means the tips deduction is more valuable for single filers — it is twice the cap for the same phase-out range. For MFJ filers, both caps are $25,000, making them equally valuable.
Phase-Out Is Calculated Separately
Each deduction is phased out independently. If you are in the phase-out range for both, you lose a proportional amount of each deduction separately — not a combined phase-out that reduces both together. This means the order in which deductions are applied to MAGI matters for subsequent calculations.
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 — partial deduction. 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 401(k) contributions to reduce MAGI (traditional 401(k) contributions reduce AGI dollar-for-dollar, potentially pulling MAGI below the $150,000 threshold); HSA contributions (also reduce MAGI); claiming the tips deduction first if applicable (as described above). Consult a tax professional if your income is near the phase-out range — the optimization can be worth hundreds or thousands of dollars.
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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 is completely eliminated above $200,000 (single) or $400,000 (MFJ). The reduction is linear: for every $1 above the start threshold, you lose $0.25 of deduction. Most hourly overtime workers earn well below the $150,000 threshold and qualify for the full deduction.
Does the tips deduction affect the overtime deduction phase-out?
Yes, indirectly. The tips deduction reduces AGI before the overtime phase-out is calculated. If you claim a $25,000 tips deduction, your MAGI for overtime phase-out purposes is $25,000 lower. This can shift a worker from the phase-out range to below the $150,000 threshold — unlocking the full overtime deduction. The interaction can produce meaningful additional savings.
Q
Do nurses and construction workers typically hit the phase-out?
Most do not. BLS median wages for nurses are $75,000-$95,000 and for construction workers $55,000-$80,000. Even adding significant overtime, most fall below the $150,000 single-filer threshold. 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 income 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.