Progressive Income Tax States
In states with progressive tax systems, your highest-earned dollars (like overtime) are taxed at higher rates. The 2026 federal exemption provides significant relief by removing the top layer of federal tax.
The Marginal Rate Impact
In a progressive tax system, your income is divided into buckets. The last dollars you earn (like overtime) fall into the most expensive bucket. By excluding overtime from federal taxable income, the 2026 reforms effectively lower your effective tax rate.
However, residents must remain aware of "State Conformity." If your state legislature does not mirror the federal exemption, you will still pay state income tax on those overtime hours at your highest bracket.