Beginning with the 2026 and ending with the 2028 calendar year, taxpayers will now be able to deduct the premium portion of their overtime wages on their Alabama tax return regardless of whether they itemize deductions or not. The deduction is the lesser of the actual overtime premium or a maximum annual amount of $1,000 per taxpayer.
Only the premium portion of overtime wages is considered deductible overtime. The overtime premium portion is the amount above your base rate or pay. If you earn time and a half for overtime, only the half portion above your base rate of pay is considered the overtime premium.
Overtime Premium example: If you earn $10 per hour base pay and earn time and a half overtime pay of $15 per hour, only the half portion of $5 is considered overtime premium.
Overtime pay of $15 per hour. 10 overtime hours worked.
10 hours x $10 = $100 regular base pay.
10 hours x $5 = $ 50 overtime premium included in Box14 of Form W2.
Total overtime wages paid = $150 included in total wages on Form W2.
W2 reporting: The total overtime wages will be included in box 16 of Form W2.
Only the overtime premium will be included in Box 14 of Form W2 per IRS rules.
The information included in Box 14 will not change wages, withholdings, or taxes on Form W2. It is information for the employee to use in their overtime deduction.
Remember: Taxpayers will only be able to deduct the lesser of the actual premium portion of their overtime or $1,000 on their Alabama income tax return regardless of whether they itemize deductions or not.
For information on the previous overtime exemptions, see the links below.