Tax cuts are in the news again. This time, former president Donald Trump grabbed headlines recently when he floated the idea of making all overtime hours tax-free for workers who exceed 40 hours per week. The announcement during a campaign rally in Tucson, Arizona, has become another hot tax topic, like no tax on tips, in the 2024 presidential race.
"We will end all taxes on overtime,” Trump told supporters.
The Republican presidential nominee argues that eliminating the tax on overtime pay would incentivize work, benefit hardworking Americans, and make it easier for companies to attract employees.
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“That gives people more of an incentive to work. It gives the companies a lot. It's a lot easier to get the people,” Trump added.
So, is this proposal an empty campaign promise? And what’s the current state of play with overtime pay?
Here’s more of what you need to know.
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How overtime is taxed
Overtime pay is taxed like regular wages.
- The Fair Labor Standards Act (FLSA) mandates that eligible workers receive at least 1.5 times their standard pay rate for hours worked beyond the typical 40-hour workweek.
- Overtime pay is subject to federal income tax, and Social Security and Medicare taxes.
- The Department of Labor recently enacted a new overtime rule that is expected to help millions of workers. (More on that below.)
In recent years, Gallop polling reveals a majority of workers regularly clock more than 40 hours a week.
Meanwhile, other data show that nearly 80% of voters support some form of overtime pay protection for all workers. (That support was reportedly strong across political party lines.)
No tax on overtime?
This proposal is part of a series of tax cut promises Trump has made during his campaign. As Kiplinger has reported, he has previously suggested eliminating taxes on tips and ending tax on Social Security benefits.
These proposals, which have faced criticism from economists and policymakers, are seen by some as ways to appeal to working-class voters and set himself apart from the Democratic presidential nominee, Vice President Kamala Harris.
Note: Harris has proposed several new tax credits, including an expanded child tax credit, and a proposal to end federal taxes on tips.
While the idea of tax-free overtime may sound appealing, critics worry. There's the potentially significant loss of federal tax revenue (on the low end, depending on what income is exempted, an estimated $145 billion over ten years according to the Tax Foundation) and the possibility of employers relying more on overtime instead of hiring additional workers.
Similar concerns have been raised about the no-tax-on-tips proposal (the Tax Foundation estimates a cost, on the low side, of $107 billion over ten years).
The Harris campaign reportedly dismissed Trump's proposal as "desperate scrambling."
Project 2025 overtime pay
It’s worth noting that policy proposals in Project 2025, widely seen as a playbook for a future Republican administration, run counter to expanding overtime protections.
For example, the conservative blueprint states, “Congress should provide flexibility to employers and employees to calculate the overtime period over a longer number of weeks.”
The Center for American Progress says this approach “would put more power in the hands of employers to exploit employees, which is seemingly part of Project 2025’s larger goal: pad corporate bottom lines at the expense of workers.”
Trump has tried in recent weeks to distance himself from the playbook, saying in the recent presidential debate, "I have nothing to do with Project 2025. That's out there. I haven't read it. I don't want to read it."
For more information, see Kiplinger's Project 2025 Tax Overhaul Blueprint report.
Overtime pay 2024: Bottom line
This campaign pledge comes as many in the U.S. are dealing with the varied impacts of inflation, including worry over wages and income not keeping pace.
The Biden administration recently enacted a rule raising the minimum salary requirement for overtime pay eligibility, which is designed to boost wages for workers with lower incomes.
- The new Department of Labor rule is scheduled to take effect in two stages over the next year.
- The FLSA salary threshold increases to $43,888 annually ($844 per week), up from the previous $35,568 ($684 per week). Future threshold increases will occur in later years, beginning as soon as 2025.
- This change is expected to extend overtime pay protection to millions of additional workers who weren’t previously eligible.
Still, as the 2024 presidential election approaches (November 5th is less than 60 days away), economic policies like the overtime tax proposal will likely face scrutiny.
Do your research and weigh potential benefits and downsides, for you, of any tax proposals.
Also, remember that whoever wins the White House will have to go through a divided Congress to enact any new tax policy. That’s no small feat.
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