Will a $1,000 Overtime Deduction Restore Your Take-Home Pay?
Alabama's tax-free overtime has officially expired. We analyze the 2026 proposal to restore relief and whether a $1,000 deduction can offset the 22% surge in the cost of essentials.
Just three years ago, Alabama made history as the first state to strip income taxes from overtime pay. Yet the celebration for overtime workers was short-lived.
Following the law's sunset last year, overtime earnings are once again fully subject to state income taxes, just as the cost of goods like groceries and utilities has surged 22% over the last five years in Alabama.
A new legislative push — House Bill 527 — aims to provide some state overtime relief through a proposed $1,000 tax deduction. But with Alabama workers facing a tightening economy, is a capped deduction enough to offset the loss of a total exemption?
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We crunched the numbers to see how much this new bill actually puts back in your family's wallet.
New Alabama state tax overtime bill
Late last month, House Majority Whip Rep. James Lomax (R-Huntsville) introduced HB 527. The bill proposes an individual income tax deduction for Alabama overtime wages up to $1,000 per year. If passed, the tax break would be retroactive to January 1, 2025, and remain in effect through December 31, 2027.
The bill is designed to provide relief for working families facing affordability challenges.
"Affordability is the number one issue in our country," Lomax reportedly said, according to ABC 33/40. "...my legislation follows the lead President Trump set in the Big Beautiful Bill."
However, this isn't Alabama's first rodeo with overtime pay.
As Kiplinger reported, House Minority Leader Anthony Daniels (D-Huntsville) successfully passed a temporary Alabama law that exempted overtime pay from the state's 5% income tax.
While popular among supporters, the state's "no tax on overtime" law became a victim of its own success:
- Initially, estimated costs were projected to be around $34 million annually.
- In actuality, total costs came out to a staggering $350 million.
- Due to budget concerns, state lawmakers allowed the law to expire last year.
The proposed $1,000 cap seeks to balance worker relief while preventing the budget shortfalls seen under the state's former overtime policy. But a $1,000 overtime deduction might not be enough to hold water with Alabama's rising prices.
Alabama taxes on overtime and the cost of living
To understand the impact of the new $1,000 deduction on affordability, we looked at a "typical" Alabama overtime worker earning an average income of $52,400.
Line Item | Fully Taxed Overtime | Overtime Tax Break |
Average income | $52,400 | $52,400 |
State standard deduction and personal exemption | $4,000 | $4,000 |
Proposed $1,000 overtime deduction | $— | $1,000 |
State taxable income | $48,400 | $47,400 |
Estimated state tax liability | $2,380 | $2,330 |
Total annual savings | $— | $50 |
*Note: "Typical" in this sense was a worker with average overtime earnings of $52,400, according to ZipRecruiter. This simplified example assumes a single filer with overtime wages and a minimal state standard deduction and exemption. Actual financial situations may vary.
As shown above, a single overtime worker earning $52,400 receives just $50 in annual tax savings. In a state where costs like housing continue to climb, a $4.58 monthly savings may feel negligible.
For instance, consider just monthly rent and grocery data for a fictional Alabama family:
Essentials | Average Cost Per Month |
Groceries per family (according to World Review) | $1,086.56 |
Average monthly rent paid on a 1-bedroom apartment (according to Numbeo, retrieved March 2026) | $1,055.44 |
Average Total Cost of Groceries and Rent | $2,142 |
With combined rent and food costs averaging $2,142 per month, these two essentials alone account for about $25,700 annually, or 49% of the average overtime worker's take-home pay.
Is "no tax on overtime" in 2026 the best way forward?
The Institute on Taxation and Economic Policy (ITEP), a nonpartisan research organization, suggests another route to provide relief to Alabama overtime workers.
"Instead of exempting overtime pay from income tax, labor experts argue that increasing overtime rates beyond time-and-a-half and raising the annual income threshold for overtime pay (currently set at $35,685) is how to best support workers and boost wages."
By raising the federal salary threshold, state lawmakers could expand overtime eligibility to thousands of Alabamians who are currently classified as "exempt" despite working well over 40 hours per week.
The Economic Policy Institute states that raising the federal salary threshold could encourage employers to hire additional staff or increase hours for part-time staff.
In the meantime, the $1,000 overtime deduction proposal in Alabama moves to the state House Ways and Means Education Committee for further review. Stay tuned for more updates.
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