No Tax on Overtime & Senior Deductions: The States Saying ‘No’

A new federal tax law introduces a sharp change: no tax on overtime, extra deductions for seniors and tip-income relief. But not every state is on board, some are saying “no” to the new rules. Here’s a detailed look at what it means for workers, seniors and state tax systems.

What is No Tax on Overtime?

What the law says

Under the federal One Big Beautiful Bill Act (effective for tax years 2025–2028) workers who receive overtime compensation under the Fair Labor Standards Act (FLSA) may deduct the portion of pay that exceeds their regular rate (for example the “half” of time-and-a-half) from their federal taxable income. 

The deduction cap is $12,500 for single filers and $25,000 for joint filers. Phase-out begins for single filers at $150,000 modified adjusted gross income and at $300,000 for joint filers. 

Who qualifies and how much savings?

This applies only to workers who are non-exempt under the FLSA (hourly or eligible for overtime pay). The deduction is “above-the-line” so it reduces taxable income, not just itemized deductions. 

According to the Tax Policy Center fewer than 9% of tax filings will be able to use the “no tax on overtime” deduction. The average benefit is about $1,440 for those eligible. 

Why is it called “no tax on overtime”?

Does that mean overtime pay is completely tax-free?
No, not entirely. The deduction reduces federal income tax owed on the eligible overtime portion, but payroll taxes (Social Security, Medicare) and state/local taxes still apply. 

Senior Deduction & Other Linked Tax Breaks

Extra deduction for age 65+

The law also gives individuals aged 65 or older an extra standard deduction of $6,000 (per eligible individual) effective 2025-2028. Phase-out begins at income of $75,000 for singles ($150,000 joint filers). 

Other provisions: No tax on tips, car loan interest

Alongside overtime, the law provides a “no tax on tips” deduction (up to $25,000 for singles) and a deduction for car-loan interest on U.S-assembled vehicles (up to $10,000) among others. 

The State-Level Challenge: Some States Say ‘No’

What states are doing

While the deductions apply federally, state tax systems may or may not adopt them. Some states have chosen to decouple from the federal law. 

For example, the District of Columbia passed emergency legislation that ended its eligibility for the new “no tax on overtime” and “no tax on tips” breaks due to fiscal concerns. 

Why are states opting out?

Why would a state say no to the deduction?
States that conform to the federal Internal Revenue Code (IRC) may still choose to refuse the deduction to protect revenue, avoid complexity or due to policy preference. Some states fear large revenue losses or administrative burdens.

What this means for workers

If your state has decoupled, even though you claim the deduction at the federal level, your state taxable income may still include your overtime pay. That means higher state income tax owed.

And in states where the deduction is adopted, you still must meet federal eligibility criteria. For example, in California the overtime deduction may not apply for hours required by state law beyond federal FLSA overtime. 

Key Considerations for Workers and Employers

For workers

• Check if your overtime qualifies under FLSA and if you are eligible for the deduction.
• Remember the cap ($12,500/$25,000) and income phase-outs apply.
• Ensure your employer reports qualified overtime compensation properly so you can claim the deduction. 
• State law matters: verify whether your state decouples from the federal tax change.

For employers

• Payroll systems need to track “qualified overtime compensation” separately on W-2 or other forms so employees can claim the deduction. 
• Even in 2025 (the transition year) employers may have relief from penalties when proper reporting isn’t in place yet. 
• Be aware of state tax law: if your business operates in a state that rejects the federal deduction, ensure your payroll reporting aligns.

Monitoring phases and sunset

• The deduction is temporary: it applies 2025-2028 unless extended. 
• Future tax years may see changes; stay updated.
• State legislation may follow suit or diverge; monitor your state.

Why This Matters in the Broader Tax Landscape

Supporting workers and seniors

The “no tax on overtime” rule is positioned to benefit workers who regularly work more than 40 hours and seniors who may have limited income. It is part of a broader effort to shift tax policy toward rewarding work and providing relief to older Americans.

Revenue and policy trade-offs

The federal cost is significant: for example, the Congressional Joint Tax Committee estimated roughly $89 billion cost over ten years for the overtime deduction alone.

Some policy analysts note that the number of workers who benefit is relatively small (under 10 %) so the overall impact may be modest. 

State tax sovereignty and complexity

States have to decide whether to follow the federal rule. Their choices matter for workers, for employers and for tax filing complexity. Policy differences between states could lead to confusion among taxpayers and employers alike.

Conclusion

The federal policy of no tax on overtime marks a meaningful shift in tax treatment of extra hours worked. Paired with senior deductions and other new tax breaks, it gives relief to specific groups of Americans. However the key caveats are: eligibility is restricted, the benefit is capped and states may reject the deduction entirely.

For workers, it means checking eligibility, ensuring employer reporting and understanding your state’s stance. For employers, it means adapting payroll systems and staying current with both federal and state requirements. In the end, while the name sounds simple, the reality is layered, with federal rules, state choices and documentation matters all playing a part.

If you are working overtime, nearing retirement age, or filing in a state with separate tax rules, this change could be highly relevant. Make sure you speak with a tax professional, update your payroll and review your state’s tax law to make the most of these new provisions.

Disclaimer

The content shared by Meyka AI PTY LTD is solely for research and informational purposes.  Meyka is not a financial advisory service, and the information provided should not be considered investment or trading advice.