Governor Kay Ivey on Wednesday signed House Bill 527, putting into law a new package of overtime income tax deduction and a two-month suspension of the state sales tax on groceries.
HB527, sponsored by Representative James Lomax, R-Huntsville, and carried in the Senate by Senator Arthur Orr, R-Decatur, changes the Code of Alabama section that lays out the general rules for deductions allowed to individual taxpayers and creates a temporary break on the state’s 2 percent tax on food.
In 2023, Alabama lawmakers approved a temporary tax exemption for overtime pay for eligible hourly workers, excluding overtime earnings from state income tax. The policy took effect in 2024 and ran through June 30, 2025. When it expired, overtime wages reverted to normal state tax treatment.
From tax years beginning after December 31, 2025, through December 31, 2028, Alabama taxpayers can subtract up to $1,000 of qualified overtime pay from their Alabama taxable income. It further defines qualified overtime compensation as overtime pay required under federal law that exceeds an employee’s regular rate of pay. The deduction is available whether or not a taxpayer itemizes.
When the legislation was considered in the House, Representative Marilyn Lands, D-Huntsville, proposed two separate amendments that would have raised the amount of qualified overtime compensation eligible for an income tax deduction to $5,000, then to $2,500. Lomax moved to table each amendment individually, and the House affirmed both motions.
Rep. Mike Shaw, R-Hoover, brought a floor amendment creating a two-month grocery tax break that would eliminate the state’s remaining 2 percent tax on food purchases from May 1 to June 30, 2026, though local sales taxes will still apply. Before that change, HB527 carried a fiscal note of $37.4 million. With the grocery tax holiday included, the estimated impact increased to $83.4 million.
“I am also glad we are able to put a two month pause on the state’s portion of the grocery tax to help families across Alabama. Any time we can responsibly provide some relief for the hardworking people of our state, I am all for it,” said Ivey.
Food eligible for the suspension is defined under existing Alabama law and generally includes items purchased for home consumption. The suspension does not change the local authority to levy sales taxes.
“HB527 provides meaningful, direct tax relief by delivering real savings at the grocery store for all families and rewarding hardworking Alabamians by recognizing the value of overtime work. By creating a deduction on overtime pay and temporarily suspending the state sales tax on food, this legislation puts money back into the pockets of families when they need it most,” said Lomax.
HB527 cleared both chambers with broad support before reaching the governor’s desk.
