Overtime pay to be exempt from Alabama income tax in 2024

In the 2024 tax year, Alabama income taxes won’t apply to overtime pay for full-time workers in our state, under Act No. 2023-421, which gained legislative approval on the final day of the Alabama Legislature’s 2023 regular session.

The Legislature originally approved HB217 by Rep. Anthony Daniels, D-Huntsville, and Sen. Sam Givhan, R-Huntsville, on June 1. The governor returned the bill to lawmakers June 6,  the 30th legislative day, with an executive amendment, which both bodies quickly approved. The governor signed the bill into law this morning.

Alabama’s 5% income tax will not apply to any hour’s pay over 40 and “will go back to the employee’s paycheck,” said Daniels, adding that his legislation is a “new idea that has never been tested” in another state. “Hopefully the federal government will take note and Alabama will be a trendsetter,” Givhan said.

Unless the Legislature votes to extend it, the exemption will end after the 2024 tax year.

For the 2023 tax year, the new law requires each employer, both public and private, to report to the Alabama Department of Revenue the amount of overtime paid to full-time hourly employees and the number of employees who received that pay. That data is due by Jan. 31, 2024.

For the 2024 tax year and beyond, the same data is to be provided monthly or quarterly on the same due date as monthly or quarterly reports for withholding tax returns. Withholding taxes are money an employer deducts from an employee’s gross wages and pays directly to the government.

The Revenue Department is to share the data with the Legislative Services Agency within 30 days of receiving it.

The bill is intended to “increase participation in our workforce,” Daniels said. The state’s overall labor force participation rate, the proportion of the working-age population that is either working or actively looking for work, is 56.9%, according to the U.S. Bureau of Labor Statistics.

The law takes effect Jan. 1, 2024.

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