AL
Does Alabama tax tips and overtime?
The federal deduction and the Alabama deduction are separate questions. Here is where Alabama actually lands, and why.
How Alabama builds its tax base
Alabama calculates its own tax base rather than importing a federal figure, so the federal deduction never enters the computation at all. Any relief here is a state provision in its own right, with its own rules and limits.
Tips in Alabama
Still taxedAlabama computes its own base under Ala. Code §40-18-14 (Alabama gross income) and §40-18-14.2 (Alabama AGI), so IRC §224 never touches the Alabama return; tips are wages included in Alabama gross income and no Alabama tip deduction has been enacted. ADOR's employer withholding booklet (rev. Jan 2026) states Alabama wages 'include those wages exempt from federal withholding if the wages represent taxable income under the Alabama income tax law and there is no provision under the Alabama law for a deduction corresponding to the allowable federal deduction.'
Source: Alabama Department of Revenue — Income to Be Reported on the Alabama Income Tax Return (and ADOR Withholding Tax Tables and Instructions for Employers, rev. Jan 2026) · last reviewed
Overtime in Alabama
PartlyAlabama does NOT conform to IRC §225 — no federal deduction flows through the own-base return. Separately, Act 2026-604 grants an Alabama-only deduction for the overtime premium (the amount above base rate), available to itemizers and non-itemizers, capped at the lesser of actual premium or $1,000 per taxpayer per year, for calendar years 2026 through 2028. This is far narrower than the federal $12,500/$25,000 §225 deduction. The earlier full Alabama overtime exemption (Act 2023-421, as amended) expired June 30, 2025, so for TY2025 only overtime earned Jan 1–Jun 30, 2025 was exempt and overtime earned on/after July 1, 2025 is fully taxable by Alabama.
Source: Alabama Department of Revenue — Overtime Premium Deduction (Act 2026-604) · last reviewed
Whatever your state does, your payroll taxes do not change
Both deductions reduce income tax only. Social Security and Medicare are still charged on the same wages, in every state.