H.R.405 - Keep Every Extra Penny Act of 2025 (119th Congress)
Summary
H.R. 405, the "Keep Every Extra Penny Act of 2025," proposes amending the Internal Revenue Code of 1986 to exclude overtime compensation from gross income for income tax purposes. The bill was introduced in the House of Representatives on January 15, 2025, and referred to the Committee on Ways and Means. The Act aims to allow individuals to retain more of their overtime earnings by exempting them from federal income tax.
The bill specifically targets overtime compensation required under Section 7 of the Fair Labor Standards Act of 1938. The amendment would apply to amounts received after the enactment date of the Act.
This legislation seeks to provide financial relief to workers who earn overtime pay, potentially incentivizing them to work additional hours.
Expected Effects
If enacted, this bill would reduce the federal income tax liability for individuals who receive overtime compensation. This would effectively increase their take-home pay for overtime hours worked.
The change would also impact federal revenue, potentially decreasing it due to the exclusion of overtime pay from taxable income. The exact magnitude of this impact would depend on the number of workers affected and the amount of overtime they earn.
Employers would likely need to adjust their payroll systems to reflect this change in tax law.
Potential Benefits
- Increased Take-Home Pay: Workers receiving overtime pay would see an immediate increase in their net earnings.
- Financial Incentive: The exclusion could incentivize workers to take on more overtime hours, potentially boosting productivity.
- Simplified Tax Filing: For those affected, it simplifies the calculation of taxable income.
- Economic Stimulus: Increased disposable income could lead to higher consumer spending.
- Positive Impact on Low-Income Households: Overtime pay is often crucial for lower-income families, so this could provide significant relief.
Potential Disadvantages
- Reduced Federal Revenue: Excluding overtime pay from income tax could decrease government revenue, potentially impacting public services.
- Complexity in Tax Code: While simplifying for some, it adds another layer of complexity to the overall tax code.
- Potential for Abuse: Employers and employees might collude to reclassify regular wages as overtime to avoid taxes, though this is unlikely given the Fair Labor Standards Act requirements.
- Disproportionate Benefit: Those who work significant overtime hours would benefit more, potentially exacerbating income inequality.
- State Tax Implications: The bill only addresses federal income tax; state income tax laws may still apply to overtime compensation.
Most Disadvantaged Areas:
Constitutional Alignment
The bill appears to align with the general welfare clause of the Constitution (Preamble), as it aims to improve the financial well-being of workers. Article I, Section 8, Clause 1 grants Congress the power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States.
However, the Constitution does not explicitly address the specifics of income tax exemptions. The Sixteenth Amendment grants Congress the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.
The proposed legislation falls within Congress's power to modify the tax code, as long as it does not violate any other constitutional provisions.
Impact Assessment: Things You Care About ⓘ
This action has been evaluated across 19 key areas that matter to you. Scores range from 1 (highly disadvantageous) to 5 (highly beneficial).