Maximizing Tax Benefits: OBBBA's Impact on Federal Firefighters

A windfall of tax opportunity

The One Big Beautiful Bill Act (OBBBA), enacted in July 2025, has introduced significant tax advantages for workers earning overtime pay, with particularly beneficial implications for federal firefighters. Under the OBBBA, eligible individuals can deduct up to $12,500 of overtime earnings from their taxable income each year from the 2025 through 2028 tax years, with the deduction capped at $12,500 each year if you file as single, or $25,000 per year if you're married filing jointly. The introduction of a special overtime (OT) premium pay, which is then deducted from taxable income, not only lowers a firefighter's annual tax bill but also potentially unlocks a powerful financial planning opportunity: access to the 0% long-term capital gains tax bracket.

Let's explore how this works and what it means for firefighters in different situations.

How the Overtime Premium Deduction Works

At its core, the new system calculates the "premium" portion of a firefighter's scheduled overtime pay. This is the difference between their higher overtime hourly rate and their standard base hourly rate. While this premium amount is paid to the firefighter, it is simultaneously treated as a "below-the-line" deduction, meaning it's subtracted from their gross income to determine their final taxable income. It is still subject to FICA (Social Security and Medicare) and may still be subject to State income tax.

This effectively makes a small portion (38 of 144 hours worked per pay period) of you overtime pay tax-free at the federal level. The impact is best understood through real-world examples.

Note: The following scenarios use the new OBBBA standard deduction amounts

Scenario 1: The Single Firefighter

Consider a GS-6, Step 1 firefighter at Nellis AFB filing as single.

• Gross Income: $70,605

• OT Premium Calculation: This firefighter works 38 scheduled overtime hours per pay period.

  • OT Rate: $24.99/hour

  • Base Rate: $16.66/hour

  • Premium per Hour: $8.33

  • Total Annual Premium Deduction: $8.33 x 38 hours x 26 pay periods = $8,230

    
    

Here's how this will look on their tax return, assuming no other income or credits.

Metric	OT Premium Deduction	OT Deduction W/ 5% Traditional TSP Contribution	Without OT Premium
Gross Income	$70,605	$70,605	$70,605
AGI	$70,605	$67,074	$70,605
Taxable Income	$46,625	$43,094	$54,855
Federal Tax Due	$5,348	$4,922	$6,811
Marginal Tax Bracket	12%	12%	22%
Effective Tax Rate	7.6%	7.3%	9.6%
LTCG Tax Bracket	0%	0%	15%
Room in 0% LTCG Bracket	$1,725	$5,256	$0

Analysis:

The OT premium deduction single-handedly drops this firefighter's taxable income by over $8,000. This not only saves them nearly $1,500 in taxes but, crucially, pushes their income low enough to qualify for the 0% long-term capital gains (LTCG) tax rate. When combined with a modest 5% contribution to a traditional TSP to earn the agency match, the savings are even greater, and the opportunity window in the 0% LTCG bracket widens to over $5,000.

Scenario 2: The Firefighter with a Family

Now, let's look at a GS-7, Step 1 at Nellis AFB, married filing jointly with a working spouse who earns $50,000 and one child.

• Combined Gross Income: $128,488

• OT Premium Calculation:

  • OT Rate: $27.28/hour

  • Base Rate: $18.52/hour

  • Premium per Hour: $9.26

  • Total Annual Premium Deduction: $9.26 x 38 hours x 26 pay periods = $9,148

Metric	OT Premium Deduction	OT Deduction W/ 5% Traditional TSP Contribution	Without OT Premium
Gross Income	$128,488	$128,488	$128,488
AGI	$128,488	$122,063	$128,488
Taxable Income	$87,840	$84,005	$96,988
Federal Tax Due (after CTC)	$8,045	$7,589	$9,143
Marginal Tax Bracket	12%	12%	12%
Effective Tax Rate	6.3%	6.1%	7.1%
LTCG Tax Bracket	0%	0%	15%
Room in 0% LTCG Bracket	$8,860	$12,695	$0

Analysis:

For this family, the OT premium deduction saves them over $1,100 in federal taxes and creates nearly $9,000 of room in the 0% LTCG bracket. By contributing 5% to the firefighter's TSP, they save an additional $450 in taxes and expand their 0% LTCG opportunity to over $12,000.

The Golden Opportunity: Tax-Gain Harvesting

The biggest takeaway from this new deduction may be what it opens up in the 0% long-term capital gains bracket. This deduction pushes many firefighters' taxable income into a range where they can sell appreciated assets—like stocks, mutual funds, or ETFs held for more than a year—and pay zero federal tax on the profits.

This allows for a powerful strategy called "tax-gain harvesting." A firefighter could sell an investment with an $8,000 gain, pay no tax on that profit, and then immediately buy back the same investment. The result? They still own the asset, but its cost basis is now reset $8,000 higher, significantly reducing the taxable gain on a future sale.

For Itemizers: Under Section 70120 of OBBBA, the SALT deduction limit will be increased to $40,000 starting in 2025. From 2026 to 2029, that limit will increase by a fixed 1% each year, with the cap reverting to $10,000 in 2030. A larger SALT deduction would lower taxable income even further, creating substantially more room in the 0% LTCG bracket.

The current tax benefits are significant, but they could become even more powerful after 2025.

Looking Ahead: Potential Changes in 2026 and Beyond

For non-itemizers: The OBBBA created a permanent deduction for cash contributions, limited to $1,000 for single filers and $2,000 for those filing jointly. This deduction is also applicable for tax years beginning after December 31, 2025 and it would stack directly with the OT premium deduction, lowering taxable income for all firefighters and expanding the 0% LTCG window for everyone.

Important Disclaimers and Limitations

State Tax Implications: The OBBBA is a federal tax benefit and may not be recognized by all state tax systems. State-specific rules and deductions will vary significantly, and firefighters should understand their individual state's tax law.

Individual Circumstances Vary: The scenarios presented are for illustrative purposes based on specific examples with simplified assumptions. Real-world situations involve numerous variables including additional income sources, other deductions, credits, and personal circumstances that can significantly impact tax outcomes.

Professional Guidance Essential: This analysis is for educational purposes only and does not constitute tax or financial advice. Tax laws are complex and change frequently. Federal firefighters should always consult with qualified tax professionals and financial advisors who can provide personalized guidance based on their specific circumstances and current tax law.

Planning Considerations: Any tax planning strategies, including tax-gain harvesting and retirement contributions, should be evaluated in the context of an individual's complete financial picture, risk tolerance, and long-term goals.

Disclaimer: Please consult with a qualified tax professional or financial advisor to understand how this applies to your specific situation.