Republicans‘ Overtime Tax Break Hit Biggest In Us Territories, Internal Data Shows

There’s an unexpected winner when it comes to President Donald Trump’s signature tax break for overtime wages: workers in the U.S. territories.

Internal data from the IRS shows people in territories claimed far bigger overtime deductions than taxpayers elsewhere. They collectively reported an average deduction of $7,078, more than twice the average of about $3,100, and substantially larger than in any individual state, according to records obtained by POLITICO.

That wasn’t what Republicans intended when they created the break as part of their 2025 tax cuts in hopes of appealing to working-class voters, especially in the battleground states that returned Trump to the White House in 2024. Nor is it obvious why deductions in the territories were so big.

“It’s hard to come up with a reason why those deductions would be so large,” said Joe Rosenberg, a former top tax official at the Congressional Budget Office who's now a senior fellow at the Tax Policy Center in Washington.

The data, released to POLITICO in response to a Freedom of Information Act request, comes in the heat of the midterm campaigns, as Republicans fight to hang onto control of Congress, plugging the tax cuts they passed last year as part of their "big, beautiful" megabill.

The IRS data does not list territories individually. In the states, meanwhile, taxpayers in Alaska saw the biggest average deduction, at $4,952, followed by Texas with $3,973 and Wyoming's $3,827. Vermont saw the smallest deductions, with an average $2,404.

The IRS did not provide an explanation for the variation in deductions.

The state-by-state breakdown provides a brief but substantive glimpse into the impact of last year's tax changes. The Treasury Department has delayed the release of detailed data typically released in the wake of filing season that would show how the tax cuts affected millions of Americans’ returns. And House Democratic tax writers are demanding to know where the data is. They fired off a letter to Treasury last week in which they suggested the Trump administration is withholding information that could be less than flattering. The administration has said it is waiting to include people who requested filing extensions allowing them to put off their returns until Oct. 15.

A Treasury spokesperson did not respond to requests for comment on the overtime-deduction data.

But questions have swirled for months about the overtime deduction after the Treasury indicated earlier this year that far more people than anticipated were claiming the break. In June, the agency said nearly 30 million taxpayers had taken it, more than twice what some revenue forecasters had predicted.

Complicated implementation

Tax experts suspect some of the people claimed the provision mistakenly because they ignored the fine print of the break, which is unusually complicated for a deduction aimed at average taxpayers. Only certain kinds of overtime pay qualifies for the deduction. And the Treasury temporarily waived a requirement that companies report to their workers their eligible overtime. A report released last week by the Treasury Inspector General for Tax Administration, the IRS's independent government watchdog, said the agency did not provide taxpayers with enough guidance about whether they were eligible.

The internal data, which includes returns accepted by the IRS through Aug. 2, shows taxpayers in every state claimed the break, with the overall average deduction coming in at $3,149. The size of the deduction climbed rapidly with income. People who reported making between $50,000 and $100,000 claimed an average of $3,278, while those earning more than $200,000 claimed $7,781.

But in addition to deductions in the territories being larger than the U.S. average, they were substantially bigger for people in lower-income cohorts and varied less between income levels.

For example: People making between $50,000 and $100,000 claimed $6,751 — more than twice the national average. Those making between $100,000 and $200,000 claimed $8,543, $3,000 more than the typical return in that income group.

A deduction is subtracted from someone's earnings when calculating their taxable income. The amount of money saved depends on other factors such as how much money they earned.

'Mistakes' possible

There are several possible explanations for the larger deductions, experts said.

It could be that the people worked in industries such as fishing or tourism that involve a lot of overtime. It’s also possible that many of the deductions were wrongly claimed, said Mark Mazur, a former top tax official in the Obama administration.

“Given there was little or no consistent information reporting for this item, it is possible that taxpayers or their preparers made mistakes,” he said.

Mazur wondered, too, if there were people who worked in the continental U.S. or Hawaii but used a territorial address in a territory when they filed their taxes, so their deductions appeared offshore.

They may have also been an unexplained interaction between the U.S. federal tax system and a territory’s tax rules. People in Puerto Rico, for example, generally don’t pay federal income taxes on money they earned there, though there are exceptions such as for those who work for the U.S. government. On Aug. 6, months after most people had completed their returns, the IRS posted a FAQ noting that people in the territories could not take the deduction associated with income that had been excluded on their returns.

The figures include 5,400 returns from the territories. In addition to Puerto Rico, inhabited U.S. territories include the U.S. Virgin Islands, Guam, American Samoa and the Northern Mariana Islands.

“It could be there’s an innocuous explanation, or it could be something worse,” said Rosenberg. “It’s hard to know."