New Tax-Free Overtime Law? Why Federal Agents May Not Qualify.

BLUF: It does not appear that federal agents will be allowed to deduct overtime from their federal income under the overtime deduction outlined in the One Big Beautiful Bill Act (OBBBA). Local and state law enforcement may be able to deduct some overtime, depending on their FLSA exempt status.

Disclaimer: This was just signed into law a few weeks ago. I do not know the intent of Congress in crafting this section of the bill, or how it will eventually be interpreted. There is also no IRS guidance yet. I am not a congressperson, judge, labor attorney, or IRS official. This is simply my interpretation. Don’t kill the messenger.

*UPDATE* - IRS guidance provided on 7/14/25 here. This guidance confirms that the eligible overtime is, "the pay that exceeds their regular rate of pay – such as the “half” portion of “time-and-a-half” compensation -- that is required by the Fair Labor Standards Act (FLSA)."

What’s the Overtime Deduction?

Under Section 70202 of H.R.1, the One Big Beautiful Bill Act, signed by President Trump on July 4^th, some overtime, for some individuals, became tax free.

For tax years 2025 – 2028, up to $12,500 worth of overtime for single tax filers, or up to $25,000 worth of overtime for those who file Married Filing Joint (MFJ), may be deducted from federal income.

Section (e) for married individuals’ states that the overtime deduction can only be used if you file a joint return. This means individuals who file their taxes as Married Filing Separately (MFS) will not be eligible to deduct any overtime.

It’s important to know that we’re just talking about a federal income tax deduction. This deduction does not mean the overtime pay will be free from state tax or the 7.65% federal payroll/FICA tax.

This is a “below-the-line” deduction, meaning it will still reduce taxable income, but won't reduce Adjusted Gross Income (AGI) on line 11 of the 1040. This means that other tax rules centered around AGI won't be affected by this deduction.

You do not have to itemize deductions on Schedule A in order to take the overtime deduction.

This deduction is in addition to either the standard deduction or itemized deductions. In 2025 (under the OBBBA), there is a $15,750 standard deduction for single filers, a $31,500 standard deduction for those who file Married Filing Joint, and a $23,625 standard deduction for filers who are Head of Household.

The bill states that the overtime compensation that’s deducted is the amount, “...that is in excess of the regular rate.” The interpretation I’ve seen on this so far is that if someone works an 8-hour overtime shift, the entire amount earned in that 8-hour shift is not eligible for the deduction. Instead, just the portion of pay that is, “in excess of the regular rate” would be eligible for deduction.

So, if your regular hourly pay rate is $20, your overtime rate (under FLSA) is $30 (20 x 1.5). In this scenario, the overtime premium that would be deducted from federal income is the $10 that is, “in excess of the regular rate”.

The law states that employers will be required to report the qualified overtime compensation separately on the W-2.

I think we should all expect additional guidance on this section. In fact, section (f) states, “The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance to prevent abuse of the deduction allowed by this section.”

Income Phase-Outs

These deductible overtime amounts ($12,500 single & $25,000 MFJ) are phased-out once tax filers reach a certain level of Modified Adjusted Gross Income (MAGI).

Unfortunately, there are many different MAGI calculations used for different reasons (IRA contributions, Medicare premiums, ACA credits, child tax credits, etc.).

For the purposes of the OBBBA overtime deduction:

MAGI =

(1) Adjusted Gross Income (line 11 on your 1040)

(2) Plus amounts you excluded under Foreign Earned Income Exclusion (FEIE) & Foreign housing costs (26 U.S. Code § 911)

(3) Plus amounts you excluded as income from sources within Guam, American Samoa, or the Northern Mariana Islands (26 U.S. Code § 931)

(4) Plus amounts you excluded as income from sources within Puerto Rico (26 U.S. Code § 933)

For most simple taxpayers, your MAGI most likely = your AGI (line 11 of the 1040) in this situation.

So, now that we’ve figured out MAGI, how much of the deduction is phased-out and at what income level?

From the bill: “The amount allowable as a deduction shall be reduced (but not below zero) by $100 for each $1,000 by which the taxpayer's modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return).”

What does that mean?

Single filers with MAGI at/above $275,000 get $0 overtime deduction.

Here's the math.

$275,000 MAGI (-) $150,000 phase-out start point = $125,000 above the threshold.

$125,000 above the threshold / $1,000 = 125 reductions worth $100 each (“reduced by $100 for each $1,000”).

125 reductions of $100 = $12,500

$12,500 reduced from the maximum deduction of $12,500 = $0

Couples filing MFJ with MAGI at/above $550,000 get $0 overtime deduction.

For those struggling with these phase-out problems, you have my deepest sympathies.

What Type of Overtime is Deductible?

From Section 70202 of the OBBBA: “Qualified overtime compensation means overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate (as used in such section) at which such individual is employed.”

So, let’s take a look at the Fair Labor Standards Act Of 1938 (revised May 2011) and the Department of Labor Fact Sheet #17A.

Generally, the FLSA requires that hours worked in excess of 40-hours in a workweek, be paid, “not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek.”

Seems clear cut – if you work more than 40-hours per week, any overtime should be paid at 1.5x your regular rate...unless you are EXEMPT from FLSA.

FLSA Exempt – Most Federal Agents

There are individuals who are exempt from the FLSA. These individuals are specifically exempt from the provisions in 29 U.S. Code § 206 (Minimum Wage) and 29 U.S. Code § 207 (Maximum Hours/ Overtime).

So, who is exempt under 29 U.S. Code § 213 (Exemptions)?

213(a) “The provisions of sections 206 (minimum wage) and 207 (maximum hours/overtime) of this title SHALL NOT apply with respect to—

213(a)(16) A criminal investigator who is paid availability pay under section 5545a of title 5”

213(b) “The provisions of section 207 (maximum hours/overtime) of this title SHALL NOT apply with respect to—

213(b)(30) A criminal investigator who is paid availability pay under section 5545a of title 5”

That seems pretty clear to me.

If you’re a law enforcement officer / criminal investigator who earns the 25% Law Enforcement Availability Pay (LEAP) under 5 U.S. Code § 5545a, you are most likely EXEMPT from sections 206 and 207 of the FLSA. Again, I'm not a labor attorney or the IRS, so confirm with your agency.

What does OPM have to say about this?

“FLSA exempt employees, as defined in 5 U.S.C. 5541(2), who work full-time, part-time, or intermittent tours of duty are eligible for title 5 overtime pay.” Title 5 overtime pay is not overtime pay in accordance with the FLSA.

Who exactly is FLSA exempt under 5 U.S.C. 5541?

(2)(A) An employee in or under an Executive agency

(3)(A) A law enforcement officer within the meaning of section 8331(20) or 8401(17);

(3)(D)(ii) A special agent in the Diplomatic Security Service

So, according to both OPM and 29 U.S. Code 213, if you are:

(1) A law enforcement officer/criminal investigator, and

(2) You earn Law Enforcement Availability Pay (LEAP)

You are FLSA exempt.

You can still earn other premium pay (night differential, Sunday differential, holiday pay) and Title 5 overtime, but you won’t be earning overtime at the “time and one-half” rate for every hour in excess of 40-hours, as outlined in the FLSA.

Box 35 of your SF-50 will confirm whether you are FLSA exempt or non-exempt.

Bottom Line for Feds

As of this writing, in my opinion, this means federal agents / law enforcement officers / criminal investigators who earn LEAP and overtime under Title 5, CANNOT deduct any amount of overtime from their federal income.

Until we’re told otherwise by Congress, the IRS, and/or our agencies, I feel comfortable saying this due to the OBBBA definition of qualified overtime being, “overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938.

Local & State Law Enforcement

It appears that local and state law enforcement, who are not FLSA exempt, may be able to deduct overtime in accordance with OBBBA section 70202.

This is trickier since every department operates differently and may have non-traditional schedules.

Under 29 U.S. Code § 207(k), there is guidance for public agencies (fire and police) with non-traditional work periods (e.g. 7 consecutive days, 10 on/10 off, etc.).

The FLSA exemptions for minimum wage and overtime provisions outlined in 29 U.S. Code § 213(a)(1) and the Department of Labor Fact Sheet #17A are specifically for white-collar “employees employed as bona fide”:

(1) Executive (managing, supervision, hiring/firing)

(2) Administrative (office/non-manual work, business operations)

(3) Professional (learned vs. creative)

(4) Computer employee (systems analysis, software functions, design, testing)

(5) Outside Sales Employees (sales away from the place of employment)

Department of Labor Fact Sheet #17A says that the FLSA exemptions DO NOT APPLY to police, fire fighters, paramedics & other first responders.

Department of Labor Fact Sheet #17J, which is specific to first responders and the Part 541 Exemptions says that:

“29 C.F.R. § 541.3 provides that police officers, detectives...and similar employees (“first responders”) are NOT EXEMPT under Section 13(a)(1) or the regulations and thus are protected by the minimum wage and overtime provisions of the FLSA. First responders generally do not qualify as exempt executives because their primary duty is not management.”

There is 29 U.S. Code § 213(b)(20) which talks about a “public agency” that employs “less than 5 employees” during the workweek.

The provisions of section 207 (maximum hours/overtime) of this title SHALL NOT APPLY with respect to—

“Any employee of a public agency who in any workweek is employed in fire protection activities or any employee of a public agency who in any workweek is employed in law enforcement activities (including security personnel in correctional institutions), if the public agency employs during the workweek less than 5 employees in fire protection or law enforcement activities, as the case may be.”

To me, this sounds like a small police department may be allowed to avoid paying FLSA overtime, regardless of the role in the department. However, it would not exempt them from the minimum wage requirements outline in section 206.

Bottom Line for Local & State

Check with your Human Resources department and/or union to find out if you are FLSA exempt or non-exempt. There may be collective bargaining agreements, contracts, or memos in place that dictate when you are/aren’t paid FLSA overtime.

About the Author

Tyler Weerden is a fee-only financial planner and the owner of Layered Financial, a Registered Investment Advisory firm based in Arlington, Virginia. In addition to being a financial planner, Tyler is a full-time federal agent. He holds a Bachelor of Science degree, a Master of Science degree, passed the Series 65 exam, and is a Certified Fraud Examiner (CFE). Tyler is the sole Investment Adviser Representative at Layered Financial.

Prior to becoming a federal agent, Tyler served as a state trooper, local police officer, and was a member of the U.S. Army National Guard. He has served in both domestic and overseas Foreign Service assignments. Tyler has experience with local, state, and federal pension systems, 457(b) Deferred Compensation, the federal Thrift Savings Plan (TSP), Individual Retirement Accounts (IRAs), Health Savings Accounts (HSAs), and various investment options to include rental real estate.

Disclaimer

Layered Financial is a Registered Investment Adviser registered with the Commonwealth of Virginia and State of Texas. Registration does not imply a certain level of skill or training. The views and opinions expressed are as of the date of publication and are subject to change. The content of this publication is for informational or educational purposes only. This content is not intended as individualized investment advice, or as tax, accounting, or legal advice. Nothing in this article should be seen as a recommendation or advertisement. Layered Financial and its Investment Advisor Representatives have no third-party affiliations and do not receive any commissions, fees, direct compensation, indirect compensation, or any benefit from any outside individuals or companies. Although we gather information from sources that we deem to be reliable, we cannot guarantee the accuracy, timeliness, or completeness of any information prepared by any unaffiliated third-party. When specific investments, types of investments, products, or companies are mentioned, such mention is not intended to be a recommendation or endorsement to buy or sell the specific investment, solicit the business, or use that product. The author of this publication may hold positions in investments or types of investments mentioned in articles. This information should not be relied upon as the sole factor in an investment-making decision. Readers are encouraged to consult with professional financial, accounting, tax, or legal advisers to address their specific needs and circumstances.

© 2025 Tyler Weerden. All rights reserved. This article may not be reproduced without express written consent from Tyler Weerden.