Overtime Pay To Get Temporary Tax Exemption

Under a tax cut approved by Alabama lawmakers on Tuesday, overtime pay will be temporarily exempted from state income tax, the Associated Press reported.

Starting in the 2024 tax year, overtime pay will be exempted from the state’s 5 percent income tax. The exemption is set to expire in June 2025 unless it is renewed by the state legislature.

Describing the measure as a “win for everybody,” the bill’s sponsor, House Minority Leader Anthony Daniels, said this exemption will provide relief to hourly workers while helping businesses entice workers to take on overtime shifts.

Daniels added that workers in the state will be able to take home the 5 percent of their overtime pay that would have gone to the state.

Earlier in the session, lawmakers had approved a version of the bill that included an aggregate cap of $25 million on the annual amount of the tax cut. However, Republican Governor Kay Ivey asked for lawmakers to remove the cap and instead shorten the duration of the temporary exemption pending renewal by the legislature.

Last week, lawmakers in both chambers agreed to Governor Ivey’s request.

Daniels said that there will likely be political pressure on lawmakers to extend the tax cut ahead of the next election cycle.

Republican State Senator Sam Givhan, who introduced the measure in the upper chamber, said the exemption provides a “great opportunity” for those in the state that work overtime. He added that he hoped Alabama would become a “trendsetter” and that the federal government would also “take note.” 

The $25 million cap was initially added in the state Senate after senators expressed concern about the impact the tax cut would have on the budget.

The state’s Legislative Services Agency estimated that the cost to the Education Trust Fund from the tax exemption in FY2024 would be $34 million.