Alabama temporarily exempts overtime pay from income tax

Alabama has implemented a policy stipulating that hours worked beyond 40 hours per week will temporarily be excluded from total income and will not be subjected to the state’s 5% tax, starting January 1, 2024 and through June 29, 2025, as reported by WBRC. 

Signed into law by Alabama Governor Kay Ivey on November 9, 2023, the bill was introduced to alleviate inflationary pressures for Alabamians and is hoped to positively impact the state’s labor force participation rate.

The bill’s effect was likened to providing workers with a 5% boost in their wages, with the potential to offer them more financial flexibility to cope with rising expenses, since overtime pay is taxed at a higher rate of time-and-a-half.

Among the 41 states with income taxes in the US, Alabama stands alone in its exemption of overtime pay.

Although the tax cut is projected to reduce annual revenue to the Education Budget by an estimated US$45 million, the extra income is expected to be spent elsewhere, potentially mitigating the actual impact on revenue.

While the Alabama Overtime Tax Exemption Law is not permanent, confidence was expressed in the legislature’s commitment to extend it, especially since 2026 marks an election year for state lawmakers.