Overtime pay in Alabama to be temporarily exempt from income tax

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West Virginia Governor Jim Justice passes school choice legislation, tax cuts.

• Lawmakers in Alabama have approved legislation that would exempt overtime pay from the state’s 5% income tax.
• The Alabama measure will not place a cap on how much overtime pay would be eligible for tax cuts, unlike a previous version of the bill.
• The tax cut will help companies entice employees to work overtime shifts, according to bill sponsor House Minority Leader Anthony Daniels.

Overtime pay in Alabama will be temporarily exempt from state income tax under a tax cut approved Tuesday by lawmakers

The legislation will exempt overtime pay from the state's 5% income tax beginning in the 2024 tax year. The tax cut will expire in June of 2025 unless renewed by lawmakers.

House Minority Leader Anthony Daniels, the sponsor of the legislation, said the tax cut will help hourly workers and help businesses entice employees to work overtime shifts.

ALABAMA LAWMAKERS APPROVE AMENDED PROPOSAL TO EXEMPT ONLY A PORTION OF OVERTIME PAY FROM INCOME TAXES

"This is a win for everybody. From a worker standpoint, you are taking home 5% more of your overtime that would have gone to the state of Alabama," Daniels said.

Alabama lawmakers had approved a version of the bill earlier in the session that included a $25 million aggregate cap on the annual amount of the tax cut. Gov. Kay Ivey on Tuesday asked lawmakers to remove the cap but shorten how long the tax cut will be in effect until it has to be renewed. The original version would have left the tax cut in place for three years instead of 18 months.

The Alabama state Capitol is seen on July 26, 2020, in Montgomery, Alabama. The Alabama Legislature has approved a measure that would exempt overtime pay from the state’s 5% income tax. The tax cut will begin in 2024 and expire in June 2025. (Lynsey Weatherspoon/Getty Images)

Lawmakers in both chambers agreed to the changes.

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

Lawmakers in the House of Representatives applauded as the change was made removing the cap on the tax cut.

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"I think it's a great opportunity for the workers in the state of Alabama that are working overtime, not to have to pay income tax on their state portion. Hopefully, the federal government will take note and this will allow Alabama to be a trendsetter," said Republican Sen. Sam Givhan, who handled the bill in the Senate.

Senators concerned about the impact on the budget had placed the cap on the tax cut. The Legislative Services Agency estimated that the full tax cut will cost the Education Trust Fund $34 million for fiscal year 2024.