WASHINGTON – Under the “Big Beautiful Bill” signed by President Trump in July, tax exemptions on overtime wages officially went into effect this week, retroactive to cover overtime hours worked since the beginning of the year.

The measure, one of Trump’s campaign promises, is part of a broader package of tax reforms designed to ease the financial burden on American workers, particularly those in the middle-income bracket.

The new law exempts half of the overtime premium pay from federal income taxes. Specifically, the exemption applies to the extra half-time wage that workers earn above their regular hourly pay under the Fair Labor Standards Act (FLSA).

For example, a worker earning $20 an hour receives an additional $10 per overtime hour, bringing their total to $30. Only the $10 overtime premium is tax-exempt.

The exemption applies retroactively from January through the end of 2028, with an annual cap of $12,500 per individual or $25,000 for married couples filing jointly. Workers with annual incomes above $150,000 (or $300,000 for couples) are excluded.

The benefit is limited to hourly employees working more than 40 hours a week. Salaried employees and certain categories such as railroad and airline workers under special contracts are excluded.

According to the Tax Policy Center, only about 9 percent of U.S. households will benefit, with an average annual savings of around $1,400. The primary beneficiaries are expected to be middle-income hourly workers who consistently work overtime and remain liable for income taxes after deductions.

Critics note that workers unable to take on overtime due to health or personal reasons will miss out, raising concerns about fairness in how the benefits are distributed.

The Economic Policy Institute (EPI) warned that the law could encourage excessive overtime, including evening and weekend shifts, which are linked to poor physical and mental health and declining productivity.

Meanwhile, Forbes cautioned that the measure could also slow job creation, as employers may prefer to assign overtime to existing workers instead of hiring additional staff.