ALABAMA · AS OF AUGUST 2026
Alabama's overtime tax story: three different rules in three years.
Alabama pioneered "no tax on overtime" before Washington did, then let it lapse at the worst possible moment, and finally replaced it with something far smaller. If you work overtime in Alabama, the year on the calendar decides your tax treatment.
The three regimes.
JAN 2024 - JUN 30, 2025
Full state exemption (the generous era)
Act 2023-421 exempted your entire FLSA overtime pay - straight time and premium, from Alabama's 5% income tax. Broader than the federal deduction ever was.
JUL 1 - DEC 31, 2025
The gap (fully taxable)
The exemption expired June 30, 2025 and extension bills failed. Alabama taxed overtime normally for the second half of 2025, ironically, right as the federal deduction began.
TY 2026-2028
New premium deduction, $1,000 cap
Act 2026-604 (signed April 2026) allows deducting the lesser of your actual overtime premium or $1,000 per taxpayer per year, no itemizing required. Premium-only, like the federal rule, but with a cap 12.5× smaller.
Federal + Alabama: how they stack in 2026.
The two deductions are independent, and both use the premium-only concept. Take a $25/hr worker with 10 overtime hours a week for 48 weeks, a $6,000 annual premium:
- •Federal: the full $6,000 premium is deductible (below the caps and income limits), worth about $720-$1,320 depending on bracket. Exact number.
- •Alabama: $1,000 of that premium is deductible, worth about $50 at Alabama's 5% rate. The other $5,000 of premium stays state-taxable.
Reporting is convenient: Alabama piggybacks the federal W-2, total overtime wages in box 16 and the premium in box 12 code TT, the same number your federal Schedule 1-A uses.
Don't mix up the three sets of rules.
| Rule | Covers | Cap | Years |
|---|---|---|---|
| Old AL exemption (expired) | Full OT pay (1.5×) | None | 2024-6/30/2025 |
| Federal §225 deduction | Premium only (0.5×) | $12,500 / $25,000 | 2025-2028 |
| New AL deduction (Act 2026-604) | Premium only (0.5×) | $1,000 / taxpayer | 2026-2028 |
FAQ.
Is Alabama overtime still tax-free?
Not like it was. Alabama's original exemption (which covered your FULL overtime pay) expired June 30, 2025. From tax year 2026 through 2028 there's a much smaller replacement: a deduction for your overtime premium, capped at $1,000 per taxpayer per year (Act 2026-604).
What happened between July and December 2025?
A gap. The old exemption ended June 30, 2025 and nothing replaced it for the rest of the year. Alabama taxed overtime normally for those six months, even though the federal deduction was in effect. The new state deduction only starts with tax year 2026.
Can I claim both the Alabama deduction and the federal deduction?
Yes, they're independent. The federal deduction (up to $12,500/$25,000) goes on your federal Schedule 1-A; Alabama's smaller $1,000 premium deduction goes on your state return. Both use the premium-only concept, and Alabama piggybacks the W-2 box 12 code TT amount for reporting.
Does the Alabama $1,000 cap double for married couples filing jointly?
The Department of Revenue's wording is "per taxpayer," which suggests each spouse with qualifying overtime premium could take up to $1,000, but no explicit joint-return guidance has been published. Ask a preparer or watch ADOR guidance before assuming it doubles.
Sources: Alabama DOR overtime exemption pages and Act 2026-604 guidance; Act 2023-421 / Act 2024-437; Governor's April 2026 release. Educational content, not tax advice. Reviewed August 2026 by the NoTaxOnOvertimeCalc Team.