When Does No Tax on Overtime Start in Alabama?

There is no longer a blanket no tax on overtime rule in Alabama. The state exemption that began January 1, 2024 under Act 2023-421 expired on June 30, 2025, and the legislature did not renew it.¹ Overtime you earn today is subject to Alabama income tax again. A separate federal deduction, signed into law on July 4, 2025, now gives partial relief on the premium portion of overtime pay through 2028.² If you are filing a 2025 return, both rules affect you for different parts of the year.

The Alabama Exemption Ended June 30, 2025

Alabama Act 2023-421 exempted overtime pay from state income tax for full-time hourly employees who worked more than 40 hours in a week.³ The law carried a sunset date, and that date arrived on June 30, 2025.¹ Any overtime you earn from July 1, 2025 forward is taxable by the state at the usual rate, which tops out at 5% on most earnings.

How Your 2025 Return Handles the Split Year

Overtime you earned between January 1 and June 30, 2025 still qualifies for the state exemption. Your employer should have reported that amount in Box 14 of your W-2 with a label such as “EX OT WAGES.”⁴ When you file Alabama Form 40, you exclude that figure from your state taxable income. Overtime earned from July 1 onward belongs in your Box 16 state wages like any other pay.

There is one timing nuance. Overtime earned on or before June 30 but paid in July 2025 can still qualify. The Department of Revenue let employers report those late-paid wages on the July Form A-6 or quarterly Form A-1.¹ Compare your late-June and early-July pay stubs against the Box 14 total to make sure nothing was dropped.

Who the Alabama Exemption Covered

The exemption applied to hourly workers who crossed 40 hours in a single workweek. Salaried employees were excluded regardless of hours.³ Bonuses, holiday pay, and other premiums that pushed a paycheck higher did not count. Part-time and seasonal hourly workers did qualify if they went past 40 hours in a given week, since the Department of Revenue tied eligibility to the hourly-wage status and the 40-hour threshold rather than to full-time classification.⁴

The Federal Deduction That Took Over

The One, Big, Beautiful Bill Act created a federal income tax deduction for qualified overtime compensation, available for tax years 2025 through 2028.² For Alabama workers, this is the only tax break on overtime that still exists.

It does not work the way the Alabama rule worked. The state exemption took your whole overtime check off the state return. The federal deduction only covers the premium portion. If you earn time-and-a-half, only the “half” qualifies; the base hourly rate for those overtime hours remains fully taxable.⁵ If your employer pays double time, only the half-portion required by the Fair Labor Standards Act counts. Anything above the FLSA-required half does not qualify.

Federal Caps and Income Phase-Outs

The deduction is capped at $12,500 on a single return, or $25,000 for married couples filing jointly. The phase-out begins at $150,000 of modified adjusted gross income, or $300,000 for joint filers.⁵

At $25 per hour and 10 hours of overtime a week, your qualified overtime (the $12.50 half-time premium) adds up to roughly $6,500 for the year. Most hourly workers in the state will stay well under the cap. If you work 20 or more overtime hours a week at a higher hourly rate, the $12,500 ceiling may limit you before December. Joint filers both need valid Social Security numbers, and the joint return is mandatory for married couples. Filing separately disqualifies you.⁵

Who Qualifies for the Federal Deduction

You have to be covered by the FLSA and not exempt from its overtime requirements.⁵ In other words, the overtime has to be the kind federal law required your employer to pay. Overtime paid voluntarily, or under a union contract where the FLSA itself did not require it for your position, does not qualify.

The FLSA exempts certain white-collar employees based on both salary and job duties. You generally lose overtime eligibility if you earn at least $684 per week on a salary basis and perform executive, administrative, or professional duties as your primary function.⁶ Job titles do not settle the question. What you actually do each day does. Workers who perform manual labor, operate machinery, or do construction and maintenance work are entitled to overtime regardless of pay level.

Where the Numbers Show Up on Your W-2

Starting with the 2026 tax year, employers must report qualified overtime compensation separately on your W-2. A new Box 12 code, “TT,” shows the total qualified overtime you received during the year.⁷ That is the figure you use to claim the federal deduction. Your full overtime pay, including the base-rate portion, still appears in Box 1 as part of total wages.

For the first half of 2025, the Alabama exemption shows up separately in Box 14 as “EX OT WAGES.”⁴ The two figures measure different things. Box 14 tells you what Alabama exempted from state tax through June 30. Box 12 code TT tells you what qualifies for the federal deduction. Do not combine them.

FICA Still Comes Out of Every Overtime Dollar

Neither the expired state exemption nor the new federal deduction touches Social Security or Medicare tax. In 2026 you pay 6.2% for Social Security on wages up to $184,500, plus 1.45% for Medicare on all wages. An extra 0.9% Medicare surtax applies to earnings above $200,000, or $250,000 for joint filers. Your employer matches the standard 6.2% and 1.45% but not the surtax.

“No tax on overtime” was never quite that. FICA alone took 7.65% off every overtime dollar even while the Alabama exemption was in force. The state exemption saved up to 5% in state income tax, and the federal deduction now reduces federal tax on the premium half of your overtime rate. The relief is real but partial. Factor FICA in before you decide an extra shift is worth it.

Adjusting Your Withholding

If overtime is a regular part of your paycheck, your federal withholding may need a look. Overtime periods push your check into higher withholding brackets for that pay cycle, and the interaction between the new deduction and the standard tables can leave you either over- or underpaying by year-end. The IRS Tax Withholding Estimator at irs.gov/W4App will tell you where you stand. If it shows a shortfall, enter an additional per-paycheck amount in Step 4(c) of your W-4 to close the gap.⁸

When you prepare the 2025 Alabama return, exclude the Box 14 “EX OT WAGES” amount from your state taxable income and treat the rest of the year’s overtime as ordinary wages. On the federal side, claim the deduction using whatever Box 12 code TT amount applies for 2025. Keep your pay stubs from the June-to-July transition in case either return gets questioned.

1
Alabama Department of Revenue. Overtime Pay Exemption – Amended
2
Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors
3
Alabama Administrative Code. Alabama Administrative Code 810-3-72-.02 – Exemption For Overtime Pay
4
Alabama Department of Revenue. Overtime Exemption
5
Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
6
U.S. Department of Labor. Exemption for Executive, Administrative, Professional, Computer and Outside Sales Employees Under the Fair Labor Standards Act
7
Internal Revenue Service. General Instructions for Forms W-2 and W-3
8
Internal Revenue Service. Form W-4 Employee’s Withholding Certificate