The Official Scoop: Alabama’s Overtime Tax Holiday (Ending Mid-Year)

The Alabama Department of Revenue (ALDOR) has enacted the “Overtime Pay Exemption” (Act 2023-421), but with a critical deadline. For the tax year 2025 (filed in early 2026), any compensation for hours worked over 40 in a week is completely exempt from the 5% state income tax—but only if it was earned between January 1, 2025, and June 30, 2025. The program expires mid-year, and any overtime earned after June 30 is fully taxable.

As a former Hospital Billing Auditor, I spent years catching hospitals overcharging patients. Now, I’m looking at the other side of the ledger: how the state tax system has created a temporary loophole that puts money back into the pockets of nurses, factory workers, and shift laborers. If you punched the clock for more than 40 hours a week in the first half of last year, the state owes you that 5% back.

The Reality Check: Why This Matters

I saw this play out yesterday when I was reviewing payroll audits for a client in Birmingham. “Sarah,” an ICU nurse, was exhausted. She had pulled 300 hours of overtime in 2025 covering staffing shortages. She was about to decline the next shift because she felt the taxes were eating up her time-and-a-half premium.

“Look at line 14 on your W-2 preview,” I told her. Assuming she worked her overtime evenly throughout the year, about 150 of those hours (totaling $7,500 in pay) would be from before the June 30 deadline. That portion was flagged as ‘EXEMPT’. That’s $375 straight into her pocket that she used to pay a car note, rather than handing it over to Montgomery. This isn’t theoretical politics; this is rent money.

How Much Can You Save? (The Math for Jan-June 2025)

The exemption applies to the 5% Alabama state income tax on overtime earned in the first six months of 2025. It does not exempt you from Federal tax or FICA. The savings below reflect a full year’s overtime work, with only the first half being exempt.

The Paperwork Guide: How to Verify & Claim

Your employer should have stopped withholding state tax on OT wages from Jan 1, 2024, to June 30, 2025. For your 2026 filing (covering 2025), here is the exact process.

Step 1: Check Your W-2

You need to look for a specific code in Box 14 of your W-2. Employers are required to report the exempt overtime wages earned in the first half of the year here. It may be labeled as:

• EX OT WAGES
• AL-OT
• Or simply included in the state wages section with a separate breakdown.

Step 2: File Form 40

When filling out Alabama Form 40 (Resident Individual Income Tax Return):

1. Locate the section for Wages, Salaries, Tips, etc.
2. There will be a line item or worksheet for “Exempt Overtime Wages.”
3. Enter the amount from W-2 Box 14. This amount is subtracted from your Total Gross Income for state tax purposes.

Deadline Warning

This exemption is temporary. It officially ends on June 30, 2025. All overtime wages earned from July 1, 2025, onward are subject to regular Alabama income tax. For the purpose of this filing guide, your deadline to claim the refund on your early 2025 earnings is April 15, 2026. Late filings can result in a forfeiture of the exemption status if audits occur, so file on time.

📚 Official Resources & Forms

• ALDOR Overtime Exemption Official Page – The primary source for Act 2023-421 details.
• Alabama Form 40 Downloads – Access the 2025 Resident Income Tax Return forms.
• FLSA Overtime Rules – Understanding what legally qualifies as overtime hours.
• MyAlabamaTaxes (MAT) – The official portal to check your refund status.

🙋‍♂️ Frequently Asked Questions (FAQ)

Does this apply to federal taxes?

No. This is exclusively an Alabama state income tax exemption. You still owe full federal income tax and FICA (Social Security/Medicare) on your overtime wages.

What if I am salaried but get overtime?

Generally, no. The law specifies “hourly wage.” However, if you are a non-exempt salaried employee who receives direct overtime pay (time-and-a-half) separate from your salary, you may qualify for overtime earned before the June 30, 2025 expiration. Discretionary bonuses or flat-rate “extra shift” bonuses for salaried staff typically do not qualify.

Do I have to itemize to get this?

No. This is an exclusion from gross income, meaning you get it regardless of whether you take the standard deduction or itemize your deductions.

What if my employer took the tax out anyway?

If your employer mistakenly withheld the 5% state tax on your overtime earned between Jan 1 and June 30, 2025, you will get it back as a tax refund when you file your Form 40 in 2026. It acts as an overpayment.

So don’t be like “Sarah” in my story—exhausted and leaving money on the table. Double-check your W-2 Box 14 and claim every cent of that partial-year overtime exemption. You earned it.