Trump’s Overtime Tax Break Faces State Resistance as Five States Block Federal Deduction

President Donald Trump’s signature policy eliminating federal income tax on overtime pay is facing significant pushback. At least five states have now enacted laws to block the federal deduction for their residents. This state-level resistance effectively nullifies the benefit for millions of workers in those regions, creating a complex patchwork of tax rules.

The “One Big Beautiful Bill” was signed into law on July 4, 2025. It included a major provision for no federal income tax on overtime earnings, a key Trump campaign promise. The measure applied retroactively to all income earned from January 1, 2025.

How the Federal Overtime Tax Break Operates

The federal law provides a deduction, not a full exemption. Only the premium portion of overtime pay qualifies for the tax break. For example, if a worker’s pay jumps from $20 to $30 per hour, only the extra $10 is eligible for the deduction.

The deduction caps are set at $12,500 for single filers and $25,000 for married couples filing jointly. According to Reuters, not all types of overtime automatically qualify. Voluntary or non-FLSA overtime may be excluded from the benefit, adding a layer of complexity for payroll departments.

States Move to Protect Revenue by Blocking the Benefit

Several states are acting to protect their own budgets from revenue loss. They have passed legislation that decouples their state tax codes from this specific federal provision. This means residents in these states must still pay state income tax on all overtime earnings.

The primary reason cited by state officials is budgetary protection. Allowing the federal deduction would create a significant shortfall in state tax collections. These states are prioritizing their fiscal stability over the federal tax cut for workers.

The List of States Rejecting the Overtime Tax Break

As of November 2025, five states have formally rejected the federal overtime tax exemption. Workers in these states will not receive the full benefit promised by the federal law.

Washington passed an emergency amendment in November 2025. New York introduced two new provisions to bypass the federal law. Illinois is expected to follow suit with similar legislation shortly. Colorado has announced it will not adopt the provision. California has also moved to tax overtime pay at the state level.

The conflict between federal policy and state fiscal needs has created a uneven landscape for American workers. The future of the overtime tax break now depends heavily on geographic location, with more states potentially joining the opposition to protect their budgets.

Thought you’d like to know

When did the no tax on overtime policy officially start?

The policy was signed on July 4, 2025. It applies retroactively to all overtime income earned since January 1, 2025.

How does the overtime tax deduction actually work?

It is a deduction, not a full exemption. Only the extra premium pay for overtime hours qualifies, and it is subject to annual caps.

Which states have blocked the federal overtime tax break?

As of now, Washington, New York, Illinois, Colorado, and California have passed laws to block the benefit for state tax purposes.

Why are states choosing to block this tax break?

States are acting to protect their own budgets. Adopting the federal deduction would lead to a significant loss of state tax revenue.

Does this mean overtime is completely tax-free in some states?

No. In states that have not blocked it, overtime is only free from federal income tax. State income tax may still apply depending on local laws.