Overtime tax exemption restored for workers

Summary#

HB-665 would amend Alabama’s Income Tax Act, Section 40-18-14. Its goal is to restore a state income-tax exemption for qualifying overtime compensation, starting with tax years beginning in 2027; the bill is introduced and is not law.

  • People’s qualifying overtime compensation under the federal Fair Labor Standards Act would be excluded from Alabama gross income for those tax years.
  • For employers covered by the National Railway Labor Act, the exemption would apply to hourly-component overtime compensation as defined in applicable collective bargaining agreements.
  • Employers would have to report overtime amounts and employee counts to the Department of Revenue, on its forms and schedule.
  • The Department of Revenue, working with the Alabama Commission on the Evaluation of Services, would have to complete a quantitative economic-impact study by January 1, 2028, and post it publicly.

What it means for you#

  • Workers receiving qualifying overtime: If the bill becomes law, that overtime would not be included in gross income for Alabama income-tax purposes beginning with tax years that start on or after January 1, 2027. The bill does not exempt all wages or change federal income tax.
  • Employers: The bill’s text requires reporting overtime totals and employee counts to the Department of Revenue. Reports are due monthly or quarterly, alongside the corresponding withholding-tax returns. The supplied materials do not include the full current law, so they do not show whether this reporting duty would be new or would continue an existing duty.
  • Alabama agencies: The Department of Revenue and the commission would have to produce the study; the Department would have to publish it.
  • Everyone else: The bill does not create an application process or an overtime payment. The supplied synopsis says the earlier exemption ended June 30, 2025; the bill would restore it for tax years starting in 2027, not 2026.

Money#

The bill would reduce Alabama income tax collected on qualifying overtime, but no amount is provided.

  • No estimate of lost tax revenue, study costs, or employer reporting costs appears in the supplied material. No publicly available information.
  • The bill requires an economic-impact study, but gives no cost estimate for producing it.

What is unclear#

  • The supplied materials do not include the full current version of Section 40-18-14, so the full comparison with current law—and whether the reporting duties are new or continuing—cannot be verified.
  • The bill does not set a dollar cap or income limit for the overtime exemption.
  • It does not explain how the exemption would be reflected in tax forms or withholding.
  • The study must estimate economic effects, including consumer spending trends, but the bill does not specify its method or other required measures.

Case for#

  • The bill appears intended to reduce state income tax on qualifying overtime pay.
  • Excluding overtime from state taxable income could leave workers with more of that pay after Alabama income tax. This is a possible effect, not a guaranteed outcome.
  • Requiring a public study could provide estimates of the exemption’s economic effects after it takes effect.

Case against#

  • One concern is that the exemption would reduce state income-tax revenue, while the bill gives no estimate of how much.
  • The study is due by January 1, 2028, after the exemption starts; the bill does not require an impact estimate before then.
  • The bill does not set a cap or income limit, so the materials do not show how the tax benefit would be distributed among people receiving qualifying overtime.