Why I believe Federal Firefighters Can Deduct Their Overtime Premium

A significant new tax law, the One Big Beautiful Bill Act (OBBBA), has introduced a potential tax deduction for overtime income starting in 2025. This is exciting news for millions of workers, but it raises a crucial question for the federal firefighter community: Will the overtime that's already built into our regular work schedule qualify?

It's a valid concern. The 38 hours of overtime that federal firefighters earn as part of their standard 144-hour bi-weekly tour of duty ("OT-in-Tour") is unique. For retirement purposes, this pay is partially treated as basic pay when calculating a firefighter's High-3 average salary for their annuity.

Does this special treatment exclude it from the new overtime deduction?

While we await official guidance from the IRS, my interpretation is that yes, the premium paid on these 38 hours of scheduled overtime will likely be tax-deductible.

Here’s my reasoning:

It Comes Down to the FLSA

The core of the issue lies in the requirements set by the Fair Labor Standards Act (FLSA). According to the IRS Fact Sheet on the new law, "Overtime compensation...that is required by the Fair Labor Standards Act (FLSA) and that is reported on a Form W-2, Form 1099, or other specified statement furnished to the individual."

For fire protection personnel, the FLSA has a specific rule: overtime is mandated for all hours worked over 106 in a 14-day work period.

Let's do the math for a standard federal fire tour:

• Standard tour of duty: 144 hours per pay period (14 days)

• FLSA overtime threshold: 106 hours per pay period

• Hours subject to FLSA overtime: 144−106=38 hours

  
  

Those 38 hours are not just a quirk of the federal pay system; they are hours that the FLSA explicitly defines as overtime. Because payment for these hours is federally mandated as overtime, the premium portion of this pay should meet the primary requirement for the new deduction.

So, What Are the Hurdles?

The biggest practical hurdle is not one of eligibility, but of reporting. The Form W-2, in its current state, does not differentiate between regular wages and overtime pay. It’s all typically lumped together in Box 1.

For this deduction to work, payroll providers like the Defense Finance and Accounting Service (DFAS) will need to specifically report how much FLSA-mandated overtime premium an employee earned.

This is where the new OBBBA legislation comes in. The law’s reporting requirements will almost certainly force an expansion of the Form W-2. We will likely see new boxes or codes designed to isolate qualifying overtime pay, similar to how tip income is reported.

Consequently, we can also expect the Form 1040 tax return to change. The deduction for overtime will be a "below-the-line" deduction, similar to where the Qualified Business Income (QBI) deduction is taken.

What to Expect Next

The key takeaway is this: based on the letter of the law and the IRS's own criteria, there is a strong case for the deductibility of the 38 hours of scheduled overtime premium.

The next step is to wait for implementation. The OBBBA was passed in July, giving the IRS, OPM, and DFAS several months to establish clear guidance and update their forms and software before the 2025 tax year begins. We should have much more clarity by the end of this year.

For now, federal firefighters have good reason to be optimistic about the potential tax benefit. Here are a couple scenarios of how this deduction might affect you and how you might have the opportunity for some tax gain harvesting.

Disclaimer: This article is for informational purposes only and is not intended as tax, legal, or financial advice. The interpretation of new tax law can change. Please consult with a qualified tax professional for advice tailored to your individual situation.