Which States Tax Overtime Under OBBBA? (w/Examples) + FAQs

This article reflects federal rules and state rules as of June 2026 and covers tax year 2025 (the first year the deduction applies). Tax law changes fast — confirm current figures with your state agency before you file.

Quick Answer

Most states still tax your overtime in full. The OBBBA “No Tax on Overtime” deduction is a federal break for tax years 2025–2028. Only a handful of states automatically follow it. The nine no-income-tax states never taxed it. The rest — including big ones like California, New York, and Illinois — keep taxing overtime at the state level.

The reason this matters comes down to one word: conformity. When Congress passed the One, Big, Beautiful Bill Act, it created a deduction of up to $12,500 ($25,000 for joint filers) on the “premium” half of qualified overtime pay for 2025. But your state writes its own tax code. So a nurse in Texas, a nurse in Iowa, and a nurse in California can each work the same overtime hours and end up with three very different tax outcomes.

That gap is real money, and the clock is ticking. The deduction is temporary and expires after 2028, and your 2025 state return is due in spring 2026. According to the National Conference of State Legislatures, more than 20 states introduced bills in 2025 to address the state tax treatment of tips and overtime — which means the rules in your state may have shifted since last filing season.

Here is what you will learn:

🗺️ Which states automatically don’t tax your overtime — and which ones still do
🧮 How to calculate the deductible “half” of your overtime pay, step by step
💵 Worked dollar examples showing exactly how much you save federally vs. what your state takes
📋 How to claim the deduction on the new Schedule 1-A and Form 1040 for tax year 2025
⚠️ The seven costly mistakes that make people overpay or trigger an IRS notice

What “No Tax on Overtime” Actually Means

The phrase “No Tax on Overtime” is a slogan, not a literal rule. The OBBBA does not make your overtime tax-free. It creates an above-the-line deduction for a specific slice of your overtime pay, and only for federal income tax. The IRS confirms that the deduction is “up to $12,500 of qualified overtime compensation earned for the year per return ($25,000 in the case of a joint return).”

The most important nuance — and the one that trips up almost everyone — is what counts as qualified overtime. It is not your full time-and-a-half wage. It is only the extra “half” premium that the Fair Labor Standards Act (FLSA) requires above your regular rate. The consequence of misunderstanding this is huge: people assume their whole overtime check is deductible, claim three times too much, and risk an IRS adjustment. What you should do: deduct only the premium portion, which is usually your total FLSA overtime divided by 3.

The federal deduction in plain English

For tax years 2025 through 2028, an FLSA overtime-eligible worker can subtract the premium half of their qualified overtime from taxable income. This is an above-the-line deduction, meaning you can claim it whether or not you itemize, and it sits alongside your standard deduction. The deduction reduces your income tax only — your overtime still pays into Social Security and Medicare (FICA), and it still counts for state and local tax unless your state says otherwise.

A common misconception is that “above-the-line” means your employer stops withholding tax on overtime. That is false. Your paycheck withholding does not change; you claim the benefit when you file. What you should do: keep working and keep your pay stubs, then reconcile the deduction on your return so you get the money back as a smaller balance due or a larger refund.

Why it expires after 2028

This deduction is a temporary provision, not a permanent change to the tax code. It is effective for tax years 2025 through 2028 and then sunsets unless Congress extends it. The consequence is that any financial plan built around tax-free overtime has a hard expiration date. What you should do: treat 2025–2028 as a four-year window, and don’t assume the break will exist when you plan overtime in 2029.

The Real Question: Does Your State Conform?

Here is the heart of the matter. The federal deduction is settled law. Whether your state honors it depends entirely on how that state ties its tax code to the federal one. There are three conformity styles, and they decide everything.

Rolling conformity states automatically adopt federal changes as they happen. Unless these states pass a law to “decouple,” they follow the new overtime deduction by default. Static (fixed-date) conformity states are frozen to the federal code as of a specific past date, so they do not pick up OBBBA unless they vote to update. Selective conformity states pick and choose, conforming to some provisions and rejecting others. The NCSL explains these three pathways in detail.

The starting point also matters. States that build their tax on federal taxable income are more likely to inherit the deduction automatically, because the deduction is already baked in before the state math begins. States that start from federal adjusted gross income (AGI) often miss it, because the overtime deduction is claimed below AGI on the new Schedule 1-A. New York is the classic example — as a static, AGI-based state, its residents do not get the break on the state return unless lawmakers act.

Which States Tax Overtime — and Which Don’t

The honest answer for tax year 2025 is that the country splits into four buckets. The exact membership of each bucket is still moving as 2026 legislative sessions wrap up, so always confirm with your state’s revenue department before filing.

The first bucket is no income tax at all. These states never taxed your overtime and never will, so the federal question is moot. Per the IRS-adjacent consensus and major tax preparers, the no-income-tax states are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming, with New Hampshire phasing out its tax on interest and dividends.

The second bucket is rolling-conformity states that pass the deduction through, meaning they do not tax the premium half of your overtime. The third bucket is states that still tax overtime — either because they decoupled on purpose or because their static code never adopted OBBBA. The fourth is the “wait-and-see” group still deciding in 2026 sessions; for now they tax overtime as usual.

State Group (Tax Year 2025)	How Your Overtime Is Treated
No income tax: AK, FL, NV, SD, TN, TX, WA, WY (NH limited)	Never taxed at the state level — no action needed
Rolling-conformity pass-through: e.g., Iowa, Montana, North Dakota, Oregon, Idaho, Michigan	Premium half generally not taxed by the state — mirrors federal
Decoupled / still taxing: California, New York, Illinois, Massachusetts, Connecticut, Hawaii, Colorado (overtime)	Overtime fully taxed by the state; may require an add-back
Wait-and-see in 2026: Georgia, Maryland, South Carolina, North Carolina	Taxed as usual for now; could change mid-season

A critical detail from Thomson Reuters: states like Iowa, Montana, North Dakota, and Oregon automatically conform to federal taxable income, so “unless they pass laws to decouple, these states will not tax tips and overtime in 2025.” Always verify your specific state, because a bucket can move in a single legislative session.

States that automatically pass it through

A small group of rolling-conformity states inherits the federal overtime deduction without new legislation. Because their state income tax begins from federal taxable income — which already reflects the deduction — the premium half of your overtime escapes state tax too. Reporting from Thomson Reuters and an industry state guide point to Iowa, Montana, North Dakota, Oregon, Idaho, and Michigan as states where the deduction generally flows through for 2025.

The consequence of living in one of these states is the best-case outcome: federal and state savings on the same overtime. The misconception here is “automatic means guaranteed forever” — a state can vote to decouple in any session. What you should do: claim the federal deduction, then check whether your state return starts from federal taxable income (good sign) and confirm no decoupling add-back applies.

States that still tax your overtime

The largest, most populous states keep taxing overtime in full. California signaled no intention to adopt the deductions because of a projected multi-billion-dollar annual cost. New York, a static AGI-based state, taxes the income on the state return even though it is deductible federally, though Governor Hochul floated a 2026 proposal to change that. Illinois requires an add-back for any tip or overtime deduction.

The consequence is a split outcome: you save federally but owe your state on the full overtime amount. Massachusetts, Connecticut, and Hawaii have also indicated they will not conform. What you should do: still claim the federal deduction (you earn it regardless of state), and budget for a state bill that does not shrink, watching for the add-back line on your state form.

The middle ground and partial conformity

Some states are hybrids. Colorado took a notable middle path: it decoupled from the overtime deduction to protect revenue but allowed the tip deduction, targeting relief to lower-wage workers. So in Colorado, your tips may get a break while your overtime does not — a reminder that “tips” and “overtime” are separate provisions with separate state answers.

The “wait-and-see” states — including Georgia, Maryland, and South Carolina — had not committed as of late 2025 and planned to address OBBBA in 2026 sessions. For now they tax overtime as usual but could adopt the deduction mid-year. What you should do: if you live in a wait-and-see state, file on time using current law, and be ready to amend if your state retroactively adopts the break.

Which Situation Applies to You?

The right next step depends on where you live and how you’re paid. Use this quick branch to find your path, then read the matching section above.

🟢 You live in a no-income-tax state (TX, FL, WA, etc.): You only deal with the federal deduction. There is no state overtime tax to worry about.
🔵 You live in a rolling-conformity pass-through state (Iowa, Montana, Oregon, etc.): You likely save at both levels. Confirm no decoupling bill passed.
🔴 You live in a decoupled or still-taxing state (CA, NY, IL, MA): Claim the federal break, but expect to pay state tax on the full overtime.
🟡 You live in a wait-and-see state (GA, MD, SC, NC): Tax applies for now; monitor your state legislature before filing late.
⚪ You are an exempt salaried employee (no FLSA overtime): You likely do not qualify at all — the deduction is for FLSA-required overtime only.

How to Calculate Your Deductible Overtime (w/Examples)

This is the math that earns the “(w/Examples)” promise — the part IRS.gov makes you figure out yourself. The deductible amount is the premium portion of your FLSA overtime, not the whole overtime check.

For standard time-and-a-half overtime, the shortcut is simple: divide your total FLSA overtime earnings by 3. The IRS Q&A confirms that for time-and-a-half pay, “the ‘half’ portion of the ‘one and one-half times’ paid for an hour of overtime work is qualified overtime compensation.” That half is one-third of the full overtime amount.

Worked Example 1: standard time-and-a-half

Maria is an hourly nurse in Iowa, a pass-through state. Her regular rate is $40/hour. In 2025 she works 200 overtime hours at time-and-a-half ($60/hour), earning $12,000 in total overtime pay. Here is the step-by-step math:

Total FLSA overtime earned in 2025: $12,000
Deductible premium half = $12,000 ÷ 3 = $4,000
Federal taxable income drops by $4,000
At a 22% federal bracket, federal tax saved = $4,000 × 0.22 = $880
Because Iowa passes the deduction through, Iowa also taxes $4,000 less, saving roughly $160 more at a ~4% state rate

Maria’s total savings are about $1,040. The full $12,000 is still reported as wages, and she still paid FICA on all of it — only the income-tax treatment changes.

Worked Example 2: the same worker in a taxing state

Now move Maria to California, a state that still taxes overtime. Her federal math is identical: $12,000 ÷ 3 = $4,000 deductible, saving $880 federally. But California does not conform, so the full overtime is taxable on her state return. At a ~9.3% California rate on the $4,000 she can’t deduct, she pays about $372 in state tax she’d have avoided in Iowa. Same job, same hours — a roughly $372 swing purely from her zip code.

Worked Example 3: hitting the $12,500 cap

Devon, a single warehouse lead in Texas, earns $45,000 in qualified overtime in 2025. Following FreeTaxUSA’s worked method, his premium half is $45,000 ÷ 3 = $15,000. But the deduction is capped at $12,500 for a single filer, so his Schedule 1-A limits him to $12,500. Because Texas has no income tax, the state never taxed his overtime anyway — his entire benefit is the federal cap amount.

The Income Phase-Out (Don’t Skip This)

The deduction shrinks as your income rises. The IRS states the deduction “is reduced if a taxpayer’s modified adjusted gross income (MAGI) for the tax year exceeds $150,000 ($300,000 for joint filers).” The reduction is $100 for every $1,000 of MAGI above the threshold, per published preparer guidance.

The consequence is that high earners can lose the deduction entirely — it fully phases out around $275,000 MAGI for singles and $425,000 for joint filers. A common misconception is that the phase-out is based on your salary; it is based on MAGI, which includes other income. What you should do: estimate your MAGI before counting on the full deduction, and remember married couples must file jointly to claim it — married-filing-separately is excluded.

How to Claim It on Your 2025 Return

Claiming the deduction happens on a new form. You report the qualified overtime premium on Schedule 1-A, Part III of Form 1040, and the deduction flows to Line 13b of Form 1040, per step-by-step preparer instructions. The form attaches to your regular 2025 federal return, due in spring 2026.

Finding your qualified overtime figure is the first task. For tax year 2025 only, the IRS granted transition relief: employers are not required to report it separately. Some employers list the premium in Box 14 of your W-2 labeled “OT OBBBA,” and per the University of Notre Dame guidance, “only the 0.5x premium appears in Box 14.” If your W-2 shows the full overtime instead, divide it by 3 to get the premium.

What changes for tax year 2026

Starting with tax year 2026, the relief ends. The IRS confirms that “for tax years 2026 and later years, employers and other payers are required to separately report qualified overtime compensation,” and Forms W-2, 1099-NEC, and 1099-MISC will be updated. The consequence is that 2026 filing will be simpler — the number will be handed to you. What you should do: for 2025, keep your final pay stub as backup; for 2026 onward, rely on the new W-2 box but still spot-check it.

If you’d like a deeper walkthrough, see our internal guides on how to fill out Form 1040, understanding W-2 Box 14, and the companion provision in our No Tax on Tips article.

Federal vs. State Treatment at a Glance

The single biggest source of confusion is mixing up the federal rule with the state rule. They are decided by different governments and can point in opposite directions.

Federal Rule (OBBBA)	State Rule (Varies)
Deduction up to $12,500 / $25,000 for 2025–2028	Many states give no deduction at all
Applies in all 50 states on the federal return	Depends on conformity; differs state to state
Based on federal taxable income, Schedule 1-A	May require an add-back (e.g., Illinois)
Premium “half” of FLSA overtime only	No-tax states ignore it; some pass it through

Mistakes to Avoid

These are the errors that cost real money or invite an IRS notice. Each one has a specific downside.

Deducting the full overtime check. The deduction is only the premium half. Claiming 3x too much can trigger an IRS adjustment and a balance due plus interest.
Assuming your state follows the federal rule. Most don’t. Budgeting on phantom state savings leaves you short when the state bill arrives.
Filing married-filing-separately. Married couples must file jointly. MFS filers lose the deduction entirely.
Forgetting the income phase-out. High earners who claim the full amount may face a correction when MAGI exceeds the threshold.
Counting double-time wrong. For double pay, only the 0.5x premium qualifies, not the full extra. Per FreeTaxUSA, divide double-time overtime by 4, not 3.
Including non-FLSA overtime. Overtime under a union contract but not required by the FLSA does not qualify, says the IRS. Claiming it overstates the deduction.
Missing a Social Security number requirement. The IRS requires a valid SSN on the return; without it, the deduction is denied.

Do’s and Don’ts

A short checklist to keep you on the right side of the rules, with the reason behind each.

Do divide standard overtime by 3 — because only the FLSA premium half qualifies.
Do confirm your state’s conformity — because the state answer can differ from federal.
Do keep your final 2025 pay stub — because employers aren’t required to report the figure for 2025.
Do file jointly if married — because MFS filers are barred from the deduction.
Do check your MAGI — because the deduction phases out above $150,000 / $300,000.
Don’t assume overtime is fully tax-free — because FICA and most state taxes still apply.
Don’t claim non-FLSA overtime — because it is not “qualified” and can be disallowed.
Don’t ignore your state’s add-back line — because states like Illinois claw the deduction back.
Don’t wait until 2029 to plan around it — because the deduction sunsets after 2028.
Don’t guess your Box 14 figure — because an inflated number invites an IRS correction.

Pros and Cons of the Deduction

Weighing the trade-offs helps you plan, especially with the sunset looming.

Pro: Real federal savings. Eligible workers cut taxable income by up to $12,500 / $25,000, lowering their federal bill.
Pro: No itemizing needed. It’s above-the-line, so you keep your standard deduction too.
Pro: Rewards extra hours. Overtime becomes more valuable after tax for qualifying workers.
Pro: Some states stack savings. Pass-through states give a second layer of relief.
Pro: Retroactive to all of 2025. The full year counts, even though the law arrived mid-year.
Con: Temporary. It expires after 2028 unless extended, so it’s not a permanent plan.
Con: State patchwork. Most states still tax overtime, blunting the benefit.
Con: Phase-out for higher earners. The break shrinks and disappears as MAGI climbs.
Con: Confusing first-year reporting. 2025 transition relief means you may have to do the math yourself.
Con: Premium-only math is easy to botch. Many people over-claim and risk a correction.

Deadlines, Costs, and Timing

Your 2025 federal and state returns are generally due in mid-April 2026, with an extension to October 2026 available for filing (not for paying). Missing the deadline without an extension can trigger a failure-to-file penalty of 5% of unpaid tax per month, so file or extend on time. The deduction itself doesn’t change those dates.

Cost-wise, claiming this deduction is free if you do it yourself — Schedule 1-A is part of the standard Form 1040, and most tax software now walks you through it. A simple return with one W-2 and overtime can be done in DIY software for roughly $0–$50. If you have multiple states, a phase-out near the threshold, or double-time and union pay mixed together, a CPA’s help (often $200–$500) can prevent a costly miscalculation.

When to Call a Professional

This article is educational and is not a substitute for advice from a licensed tax professional for your specific situation. Most single-state, single-W-2 filers can claim this deduction confidently on their own.

Call a CPA or tax attorney if your situation is complex: you worked in multiple states during 2025, your MAGI is near the phase-out threshold, you mix FLSA overtime with non-qualifying contract overtime, you’re self-employed with overtime-like pay, or you received an IRS notice about the deduction. The cost of an hour of professional advice is far smaller than the cost of a wrong number on a YMYL return.

What to Do Next

A short, ordered action plan for tax year 2025:

Confirm you’re FLSA overtime-eligible. Check that you’re a non-exempt, hourly-covered worker; salaried-exempt employees generally don’t qualify.
Find your qualified overtime figure. Look at W-2 Box 14 (“OT OBBBA”); if it’s missing, take your total 2025 overtime and divide by 3.
Check the cap and phase-out. Limit the deduction to $12,500 ($25,000 joint) and reduce it if your MAGI tops $150,000 / $300,000.
File Schedule 1-A, Part III with your Form 1040, carrying the amount to Line 13b.
Confirm your state’s rule with your state revenue department before filing the state return, watching for an add-back line.
Save your records — your final pay stub and W-2 — in case the IRS asks you to support the figure.
Call a pro if you have multiple states, near-threshold income, or mixed overtime types.

FAQs

Does OBBBA make overtime completely tax-free? No. It creates a federal income-tax deduction on only the premium “half” of FLSA overtime, capped at $12,500 ($25,000 joint) for 2025–2028. Social Security, Medicare, and most state taxes still apply to your overtime.

Which states still tax overtime in 2025? Most states, including California, New York, Illinois, Massachusetts, Connecticut, and Hawaii. These states either decoupled or never adopted OBBBA, so they tax your overtime in full on the state return.

Which states don’t tax my overtime at all? The nine no-income-tax states: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. They never taxed wage income, so the federal conformity question doesn’t apply.

Do any states automatically follow the federal deduction? Yes — certain rolling-conformity states such as Iowa, Montana, North Dakota, Oregon, Idaho, and Michigan. Because their tax starts from federal taxable income, the deduction generally passes through unless they decouple.

How much overtime can I deduct for 2025? Up to $12,500 if single and $25,000 if married filing jointly. This applies to the premium half of your qualified FLSA overtime, before any income phase-out.

How do I calculate the deductible amount? Divide your total time-and-a-half overtime by 3. That isolates the FLSA premium “half.” For double-time pay, only the 0.5x premium qualifies, so divide that overtime by 4 instead.

What form do I use to claim it? Schedule 1-A, Part III, attached to Form 1040. The deduction then flows to Line 13b of your 2025 Form 1040.

Does my employer report overtime separately on my W-2? Not required for 2025. The IRS granted transition relief, so some employers use Box 14 and others don’t. For tax year 2026 and later, separate reporting becomes mandatory.

Can I claim it if I’m married filing separately? No. Married taxpayers must file a joint return to claim the deduction. Filing separately disqualifies you entirely.

When does the deduction expire? After tax year 2028. It applies to tax years 2025 through 2028 and then sunsets unless Congress votes to extend it.

Does salaried overtime count? Usually no. The deduction covers overtime required by the FLSA, which generally means non-exempt hourly workers. Exempt salaried employees typically don’t qualify even if paid extra.

Will I get a bigger refund right away? Not from withholding — you claim it at filing. Your paycheck tax doesn’t drop; the benefit shows up as a lower balance due or larger refund on your 2025 return.

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