Analysis of the Overtime Pay Tax Relief Act of 2025 and its Impact on Income Brackets
I. Introduction:
House Bill 561, formally titled the "Overtime Pay Tax Relief Act of 2025," represents a legislative initiative in the 119th Congress with the aim of providing tax relief to individuals who receive compensation for working overtime.1 The bill proposes to amend the existing Internal Revenue Code of 1986 (IRC) by introducing a new provision that allows for a deduction of certain overtime payments.1 This action suggests a Congressional intent to alleviate some of the federal income tax burden on those whose work hours exceed the standard full-time workweek. While initial summaries of the bill indicated a purpose to exclude overtime pay from gross income 2 or to provide a tax deduction equivalent to the amount of overtime pay received 2, the official legislative text clarifies that the mechanism for tax relief is a deduction.1
The distinction between an exclusion and a deduction is a critical aspect of tax policy. An exclusion would mean that overtime earnings are never included in an individual's taxable income, potentially leading to a more significant reduction in tax liability, particularly for those in higher tax brackets. Conversely, a deduction reduces taxable income after gross income has been calculated. While both mechanisms offer tax relief, a deduction's impact is generally proportional to the individual's marginal tax rate. The fact that H.R. 561 proposes a deduction suggests a more targeted approach to providing relief, potentially with a more controlled impact on federal revenue compared to a blanket exclusion of overtime pay. This report will analyze the specific provisions of H.R. 561 to accurately determine its primary beneficiaries, provide essential background on the Internal Revenue Code of 1986, and identify the income brackets most likely to be affected by these proposed changes, as well as those that will remain unaffected.
II. Background of the Internal Revenue Code of 1986:
The Internal Revenue Code (IRC) serves as the foundational body of law that codifies all federal tax regulations within the United States.3 The journey towards a comprehensive tax code began in 1874 with initial attempts at codification, but it wasn't until 1939 that the first unified Internal Revenue Code was established.3 Recognizing the need to adapt to evolving economic landscapes and societal needs, this original code underwent significant revisions in 1954 and, most notably, in 1986.3 The extensive nature of the changes introduced by the Tax Reform Act of 1986 led to the current iteration being officially known as the Internal Revenue Code of 1986.3 These periodic overhauls highlight the continuous efforts to refine and update the federal tax system in response to changing circumstances.3
The Tax Reform Act of 1986 (TRA 86), signed into law by President Ronald Reagan on October 22, 1986 5, was a landmark piece of legislation that aimed to fundamentally reshape the American tax system. The primary objectives of TRA 86 were to "simplify the income tax code" 5, enhance fairness, broaden the base of income subject to taxation by eliminating numerous tax shelters and preferences 5, and ultimately stimulate economic growth.5 One of the most notable changes introduced by TRA 86 was the significant reduction in the top marginal tax rate on ordinary income, which was lowered from 50% to 28%, coupled with an increase in the bottom tax rate from 11% to 15%.5 This marked the first time in U.S. tax history that the top tax rate was decreased while the bottom rate was simultaneously increased.5 This comprehensive reform effort underscores the significant impact that legislative action can have on the structure and function of the nation's tax system.
The Internal Revenue Code serves multiple critical functions within the United States. Its primary purpose is to generate revenue that funds the various operations and services provided by the federal government.13 Beyond revenue generation, the IRC can also be employed as a tool for social and economic policy, influencing the distribution of wealth across different segments of the population.13 Furthermore, the tax code often includes provisions designed to encourage or discourage specific behaviors by taxpayers through the use of incentives and disincentives, such as tax credits for research and development.13 It is also acknowledged that political considerations can sometimes play a role in shaping the tax code, with certain provisions potentially aimed at benefiting specific groups or constituencies.13 As the highest form of tax law in the country, created by the United States Congress 13, the IRC forms the bedrock of the federal tax system.
The IRC is formally organized as Title 26 of the United States Code (26 U.S.C.).3 Its structure is hierarchical, divided into subtitles, chapters, subchapters, parts, subparts, and individual sections.4 This systematic framework allows for a detailed and comprehensive organization of federal tax laws. Subtitle A of the IRC specifically addresses Income Taxes 4, making it the most relevant section for the analysis of H.R. 561. Other subtitles cover diverse areas of taxation, including Estate and Gift Taxes (Subtitle B), Employment Taxes (Subtitle C), and Excise Taxes (Subtitle D).4 The IRC is commonly referenced by its section numbers, which run sequentially.16 H.R. 561 proposes to amend Subchapter B of Chapter 1 of Subtitle A, which deals with the computation of taxable income, by adding a new Section 224 titled "OVERTIME COMPENSATION".1 This specific placement indicates that the proposed overtime pay relief is intended to function as a deduction in the calculation of an individual's taxable income.
The responsibility for implementing and administering the Internal Revenue Code rests with the Internal Revenue Service (IRS), an agency of the federal government.3 The IRS provides detailed interpretations of the IRC through Treasury Regulations, Revenue Rulings, and various other forms of official guidance, which serve to clarify the application of the law for taxpayers.3 In addition to the executive branch's role in implementation, the federal judiciary also plays a crucial role in interpreting the IRC through court decisions issued in response to legal challenges and disputes.18 Therefore, the practical impact and effectiveness of any amendment to the IRC, such as the one proposed by H.R. 561, will ultimately depend on the interpretations and actions of both the IRS and the federal courts.
III. Analysis of H.R. 561: The Overtime Pay Tax Relief Act of 2025:
The central aim of H.R. 561 is to amend the Internal Revenue Code of 1986 to provide a tax deduction for individuals who receive overtime payments.1 While earlier summaries suggested an exclusion from gross income or a direct tax deduction equivalent to the overtime pay 2, the official text clarifies that the mechanism is the establishment of a new deduction under Section 224 of the IRC.1
Specifically, Section 2(a)(1) of the bill proposes the insertion of this new Section 224, which will allow an eligible individual to deduct an amount equal to the overtime compensation they have received.1 However, this deduction is not without limitations. A significant restriction is that the deductible amount of overtime compensation cannot exceed 20 percent of the individual's other wages earned from the same employer during the taxable year [1 Section 2(a)(1)(a)]. This cap suggests a deliberate effort to limit the scope of the tax relief, potentially ensuring that it primarily benefits those for whom overtime earnings are a supplementary part of their overall compensation, rather than the primary source of income. This limitation could also serve as a measure to manage the potential reduction in federal tax revenue that might result from this new deduction.
For the purposes of this proposed tax deduction, H.R. 561 provides a clear definition of "overtime compensation" by explicitly referencing Section 7 of the Fair Labor Standards Act of 1938 (FLSA) [1 Section 2(a)(1)(b)]. The FLSA is a foundational piece of U.S. labor law that mandates overtime pay at a rate of not less than one and one-half times the regular rate of pay for hours worked in excess of forty in a workweek for covered nonexempt employees.19 By linking the definition of overtime compensation in the tax bill to the established definition in the FLSA, H.R. 561 ensures clarity and avoids potential ambiguities regarding which types of extra pay qualify for the proposed deduction. This alignment with existing labor law provides a consistent framework for both taxpayers and the Internal Revenue Service.
Furthermore, H.R. 561 includes specific adjusted gross income (AGI) thresholds that determine an individual's eligibility for this overtime pay deduction [1 Section 2(a)(1)(c), 1]. These limitations are structured based on the taxpayer's filing status:
For married couples filing jointly, the deduction is not allowed if their AGI for the taxable year exceeds $200,000.
For individuals filing as head of household, the AGI threshold is $150,000.
For all other individuals, including those filing as single or married filing separately, the AGI limit is $100,000. These income limitations clearly indicate that the legislative intent behind H.R. 561 is to provide tax relief primarily to middle-income earners who receive overtime pay. Higher-income taxpayers, whose AGI surpasses these specified levels, will not be eligible to claim this deduction. This targeting of tax relief suggests a policy focus on assisting a particular segment of the working population.
It is also important to note that H.R. 561 includes a termination date for this proposed deduction. According to the bill, no deduction will be allowed for any amounts of overtime compensation received after December 31, 2029 [1 Section 2(a)(1)(d)]. This sunset provision makes the overtime pay tax relief a temporary measure. The inclusion of such a date often allows policymakers to assess the effectiveness and economic impact of the provision over a defined period before deciding whether to extend, modify, or allow it to expire.
The bill also addresses how this new deduction will be treated for taxpayers who itemize their deductions versus those who claim the standard deduction. Section 2(b) of H.R. 561 amends Section 63(b) of the IRC to explicitly include the deduction provided in the new Section 224 as one of the deductions allowed in determining adjusted gross income for individuals who do not itemize.1 This is a significant provision because it ensures that taxpayers who choose to take the standard deduction, which is the majority of filers, can still benefit from the overtime pay deduction. This broadens the potential impact of the bill, making the tax relief accessible to a wider range of overtime workers, regardless of whether they itemize their other deductions.
For taxpayers who do itemize, Section 2(c) of H.R. 561 includes specific amendments to ensure that the overtime compensation deduction is not unduly restricted. Firstly, it amends Section 67(b) of the IRC to specify that the deduction under Section 224 is not to be treated as a miscellaneous itemized deduction subject to the 2-percent floor [1 Section 2(c)(1)]. This means that itemizers can deduct the full amount of their eligible overtime pay (up to the 20% limit) without having to exceed a certain threshold of miscellaneous deductions. Secondly, the bill amends Section 68(c) of the IRC to state that the overtime compensation deduction is not subject to the overall limitation on itemized deductions that applies to higher-income taxpayers [1 Section 2(c)(2)]. These provisions for itemizers are crucial as they prevent the value of the overtime pay deduction from being diminished or eliminated by the limitations that typically apply to certain other itemized deductions, particularly for those with higher incomes. This ensures a more equitable treatment of the deduction for both itemizers and non-itemizers.
Finally, Section 2(d) of H.R. 561 directs the Secretary of the Treasury (or their delegate) to make necessary modifications to the withholding tables and procedures under Section 3402(a) of the IRC to account for the newly allowed deduction under Section 224.1 This directive suggests that the Internal Revenue Service will likely adjust the payroll tax withholding system to reflect the availability of this deduction. The implication of this is that eligible employees who regularly work overtime could potentially see a reduction in the amount of federal income tax withheld from their paychecks throughout the year, rather than having to wait until they file their annual tax return to realize the benefit of the deduction. This adjustment in withholding would provide more immediate financial relief to affected taxpayers.
IV. Identification of Primary Beneficiaries:
The primary beneficiaries of H.R. 561 are clearly defined as individuals who receive overtime compensation, as stipulated under Section 7 of the Fair Labor Standards Act of 1938, and whose adjusted gross income falls within the specified limits.1 These income thresholds are set at $100,000 for those filing as single or married filing separately, $150,000 for heads of household, and $200,000 for married couples filing jointly.1
The bill is particularly likely to benefit workers in industries where overtime hours are a common occurrence. This includes sectors such as manufacturing, where production demands can lead to extended work schedules; transportation, where drivers and logistics personnel often work beyond standard hours; healthcare, where nurses, doctors, and other medical professionals frequently work overtime to meet patient needs; and public safety, including police officers, firefighters, and emergency medical technicians. Individuals employed in these and similar fields, who meet the income criteria, stand to see a reduction in their federal income tax liability as a result of this proposed legislation.
The impact of the bill will vary depending on the taxpayer's filing status and income level within the eligible range. Single individuals and those married filing separately with AGIs up to $100,000 who work overtime will experience a tax reduction. Heads of household with AGIs up to $150,000 who receive overtime pay will also benefit. For married couples filing jointly, the combined AGI must be no more than $200,000 for them to be eligible for the deduction on any overtime pay earned by either spouse.
The actual amount of tax savings realized by an individual will depend on the amount of overtime pay they receive (subject to the 20% of other wages limit) and their marginal tax rate. The U.S. tax system is progressive, meaning that higher income levels are taxed at higher rates. Consequently, while all eligible overtime workers will receive a tax benefit, those in higher tax brackets within the eligible AGI ranges will experience a greater dollar value of tax savings for each dollar of deductible overtime pay. For instance, an individual in the 22% tax bracket will save $22 in taxes for every $100 of deductible overtime pay, compared to someone in the 12% bracket who would save $12 for the same amount. However, it is important to note that for individuals with lower to middle incomes within the eligibility range, this tax saving, even if smaller in absolute terms, might represent a more significant portion of their overall disposable income and financial well-being.
V. Impact on Income Brackets:
To understand the specific income brackets that will be affected by H.R. 561, it is necessary to compare the AGI thresholds outlined in the bill with the federal income tax brackets for the 2024 tax year.22 It is crucial to remember that the tax brackets are based on taxable income, which is calculated as adjusted gross income (AGI) minus certain deductions, primarily the standard deduction. Therefore, the gross income levels of individuals who might benefit from this bill will generally be higher than the stated AGI limits.
For single filers with an AGI of up to $100,000, considering the 2024 standard deduction of $14,600 25, their taxable income would be approximately $85,400. This falls within the 10% ($0 - $11,600), 12% ($11,601 - $47,150), and 22% ($47,151 - $100,525) tax brackets. Consequently, single filers within these brackets, and potentially a portion of those in the 24% bracket ($100,526 - $191,950), could be affected by H.R. 561 if their AGI is below $100,000 and they earn overtime pay.
For heads of household with an AGI of up to $150,000, using the 2024 standard deduction of $21,900 25, their taxable income would be roughly $128,100. This income level covers the 10% ($0 - $16,550), 12% ($16,551 - $63,100), 22% ($63,101 - $100,500), and a portion of the 24% ($100,501 - $191,950) tax brackets. Therefore, heads of household within these income ranges who also receive overtime are likely to be affected by the proposed deduction.
For married couples filing jointly with a combined AGI of up to $200,000, and considering the 2024 standard deduction of $29,200 25, their taxable income would be approximately $170,800. This income range includes the 10% ($0 - $23,200), 12% ($23,201 - $94,300), and 22% ($94,301 - $201,050) tax brackets. As a result, married couples filing jointly with incomes in these brackets who earn overtime pay are expected to be affected by H.R. 561.
The following table summarizes the estimated affected taxable income brackets for the 2024 tax year based on the AGI limits in H.R. 561:
| Filing Status | AGI Limit | Estimated Taxable Income Range Potentially Affected (2024) | Corresponding 2024 Tax Brackets |
|---|---|---|---|
| Single Filer | $100,000 | $0 to approximately $85,400 | 10%, 12%, 22%, Lower part of 24% |
| Head of Household | $150,000 | $0 to approximately $128,100 | 10%, 12%, 22%, Lower part of 24% |
| Married Filing Jointly | $200,000 | $0 to approximately $170,800 | 10%, 12%, 22%, Lower part of 24% |
Income brackets not directly affected by H.R. 561 are those where the taxpayer's AGI exceeds the specified limits. For single filers with an AGI above $100,000, this would generally correspond to taxable income in the higher portion of the 24% bracket and the 32%, 35%, and 37% tax brackets. For heads of household with an AGI greater than $150,000, this would typically fall into the higher portion of the 24% bracket and the 32%, 35%, and 37% tax brackets. For married couples filing jointly with a combined AGI exceeding $200,000, this would generally be in the higher portion of the 22% bracket and the 24%, 32%, 35%, and 37% tax brackets. The establishment of these AGI limitations in H.R. 561 clearly indicates a policy decision to focus the tax relief on individuals and families within the middle-income spectrum, excluding those with higher incomes from directly benefiting from this particular provision on their overtime pay.
VI. Conclusion:
In conclusion, H.R. 561, the Overtime Pay Tax Relief Act of 2025, proposes a targeted tax deduction for overtime compensation with the primary goal of providing financial relief to eligible working individuals and families. The proposed deduction is subject to a 20% cap based on other wages and specific adjusted gross income limitations that vary according to the taxpayer's filing status.
The individuals and families most likely to benefit from this bill are those within the middle-income range who regularly work overtime and whose adjusted gross income falls below the stipulated thresholds. Workers in industries where overtime is a common practice are particularly positioned to experience a positive impact on their federal income tax liability.
The progressive nature of the income limitations embedded in H.R. 561 suggests that the legislation is intended to provide tax relief to a significant portion of the middle class, potentially easing the financial burden associated with working extra hours. Conversely, higher-income earners, whose adjusted gross income exceeds the specified limits, are explicitly excluded from receiving this tax benefit on their overtime pay.
Given that this tax provision is temporary and set to expire in 2029, its effectiveness and the potential for its future extension will likely be subjects of ongoing evaluation and discussion. The ultimate impact of H.R. 561 on taxpayers will also be significantly influenced by the specific guidelines and procedures that the Internal Revenue Service develops for implementing the deduction and adjusting payroll tax withholding.
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