Trump's plan on overtime taxes, explained

Yahoo

3 days ago

During the 2024 campaign, Donald Trump promised "no tax on overtime" — an exemption for federal income taxes on extra pay for working overtime.
So how's that coming along? There is a provision in the "big, beautiful bill" passed by the House in May. The Senate is now considering the legislation.
The details remain to be seen, but for now the tax break is much smaller than you might assume and more short-lived, as it would expire when Trump leaves office.
Here are answers to some common questions about the "no tax on overtime" proposal:
Trump first proposed to end overtime taxes at a campaign rally in Tucson, Arizona, on Sept. 12, about two months before Election Day. It was part of a broader set of proposals thrown out with little detail in the final weeks of the campaign.
'That gives people more of an incentive to work. It gives the companies a lot. It's a lot easier to get the people,' he said. 'You know, I went to some economists, great ones, and I said, 'What do you think?' They said, 'It would be unbelievable. You'll get a whole new workforce by doing that,'' he added.
As with all of his campaign proposals, details were scant. The nonpartisan Tax Foundation pegged the cost at somewhere between $227 billion and $1.5 trillion, depending on how it would be implemented. It's now clear that the proposal is on the smaller side, including only a deduction for federal income tax and not any other taxes. The Congressional Budget Office said the current overtime proposal would reduce revenue by only $124 billion.
Still, the budget provision lacks a lot of details, which means the provision will likely 'require hundreds of pages of IRS guidance' and send taxpayers 'through a maze of new rules and compliance costs,' according to the Tax Foundation.
The Big Beautiful Bill Act, which passed the House, includes an exemption on overtime taxes.
But as with the proposed $1,000 baby bonus and exemption for taxes on tips in the bill, the overtime tax break would be temporary, expiring just as Trump leaves office in 2028. That helps Republicans in Congress keep the cost of the bill down while setting up the next president to have to decide whether to spend political capital extending the exemptions or take a hit in the polls by letting them lapse.
Under the House bill, only workers making less than $160,000 per year would qualify for the exemption. It would also apply only to the amount workers are paid for overtime over their regular salaries, which employers would be required to include in a new box on your annual W-2 form. There is no cap on how much overtime a worker could claim in a year.
The Senate has not voted on its version of the spending bill, which will have to be reconciled with the House version for a final vote before heading to the president's desk.
For now, the Senate version of the bill does not include an exemption from overtime taxes. There are several standalone Senate bills to create the exemption, however, and senators could still choose to add it to their bill.
Lawmakers plan to vote on the final version of the bill by the end of summer.
The White House Council of Economic Advisers — who work for Trump — estimated that the average overtime worker would get a tax break of $1,400 to $1,750 per year until it expired in 2028.
But an analysis from the Institute on Taxation and Economic Policy pegged the average tax savings at a much lower $330 per year. What's more, it found that it would benefit higher-income workers more, with the bottom 60% snagging an average of $80 and the top 20% pocketing an average of $940.
You would need a Social Security number to claim the deduction, so it would not cover people here on work visas.
This was more likely campaign hyperbole, like the "big, strong men" with tears in their eyes whom Trump often describes.
In fact, economists have mixed thoughts about the exemption because of the loss of revenue, which would increase the national debt, and the potential for unexpected side effects in the labor market.
Under the Fair Labor Standards Act, nonexempt employees working overtime must be paid at 1.5 times their regular rate of pay for all hours they worked past 40 in a workweek.
Since that pay would now be tax-free, it's even more lucrative. This could mean more workers volunteer for overtime hours, leading employers to hire fewer new workers. Or employers could decide they're spending too much on overtime and switch to more part-time staffing. Or it might have no effect on either workers or employers, since it's only a temporary tax break.
At the macro level, the tax break might boost the economy a little by putting more cash in workers' pockets, but the loss in revenue might increase the national debt, which is starting to hurt the economy. No one knows, and the effects might be so small that they can't be measured, so we may never know.
The bottom line is that this was not an idea that economists dreamed up. It was a campaign pitch to some groups of Trump supporters — the Fraternal Order of Police, for one, endorsed the idea — who tend to work a lot of overtime.
This article was originally published on MSNBC.com