Alabama’s tax code is a bit of a relic. It’s one of the few states where the income tax rates are literally baked into the state constitution, which makes changing them about as easy as moving a mountain with a spoon. Most people living between Mobile and Huntsville just assume they’re paying a flat 5% and call it a day.
But things are shifting.
If you're sitting down to handle your state of Alabama income tax filing for the 2025 tax year (due in April 2026), you’re going to notice some weirdness. Some of it is good news—like higher deductions—and some of it is a bit of a bummer, specifically if you’re one of the thousands of hourly workers who got used to that "tax-free overtime" perk that recently vanished.
The Three-Tier Reality of Alabama’s Tax Brackets
Alabama uses a graduated system, but let's be real: the graduations are so low that almost everyone with a full-time job hits the top bracket immediately. It’s basically a flat tax in disguise.
The state breaks it down into three simple levels. For a single person, you pay 2% on your first $500. Then it jumps to 4% for the next $2,500. Anything over $3,000? You’re hit with the 5% rate.
If you’re married filing jointly, the thresholds just double. You pay 2% on the first $1,000 and 4% on the next $5,000. Once your combined taxable income passes $6,000, you’re in that 5% "ceiling" for the rest of your earnings.
It’s been this way since 1933.
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Seriously. Amendment 25 of the Alabama Constitution set these rates nearly a century ago. Because of that 5% constitutional cap, Alabama actually has one of the lower top-end rates in the Southeast, though the state makes up for it with a notoriously high sales tax.
What Changed: The 2025-2026 Shift
There’s a lot of "fine print" moving around right now. The Alabama Department of Revenue hasn't overhauled the brackets, but they have tweaked the math that happens before you calculate your tax.
The Standard Deduction Bump
For the 2025 tax year, the "One, Big, Beautiful Bill Act" (actual name, believe it or not) pushed the standard deduction up. If you're married filing jointly, your standard deduction is climbing from $8,500 to $9,500.
Single filers and heads of households saw similar proportional increases. This is a big deal because Alabama’s standard deduction has historically been tiny compared to the federal version. By raising this, the state is effectively shielding an extra thousand dollars of your income from being taxed at all.
The Overtime Heartbreak
We have to talk about the overtime exemption. In 2024, Alabama did something wild: they stopped taxing overtime pay. If you worked more than 40 hours, that extra money was invisible to the state.
That party ended on June 30, 2025.
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Unless the legislature pulls a last-minute miracle, any overtime you’ve earned since July 1, 2025, is fully taxable again. When you file your state of Alabama income tax return this year, you’ll likely have a "split" year. Your OT from the first six months is exempt; your OT from the last six months is taxed at your normal rate. It’s going to make W-2s look very confusing this January.
Better News for Seniors
If you’re over 65, the state is actually becoming more friendly. Starting January 1, 2026, the retirement income exemption is doubling. It used to be that you could exempt $6,000 of taxable retirement income. Now, that’s jumping to $12,000.
Alabama is already a "tax haven" for retirees in some ways because it doesn’t tax Social Security or most defined-benefit pensions (like those for teachers or military). This new bump just adds another layer of protection for private 401(k) or IRA distributions.
The Grocery Tax and Your Wallet
While not a direct "income" tax, the state sales tax on groceries is the one thing every Alabamian complains about. And for good reason—Alabama was one of the last holdouts taxing bread and milk at the full 4% rate.
As of September 1, 2025, the state portion of the grocery tax dropped to 2%.
Why does this matter for your income tax? Because it shows a shift in how the state is funded. Most of your income tax goes into the Education Trust Fund. For years, lawmakers were terrified that cutting grocery or income taxes would bankrupt the schools.
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The fact that they’ve managed to cut the grocery tax and raise the income tax standard deduction suggests the state is finally finding a balance, or at least riding a wave of decent revenue growth.
How to Handle Your Filing Without Losing Your Mind
Alabama’s "My Alabama Taxes" (MAT) portal is actually... okay. It’s not a masterpiece of web design, but it’s functional. If you’re a resident, you’re looking at Form 40. If you’re a "snowbird" or someone who worked a temporary gig in the Birmingham medical district but lives in Georgia, you’ll use Form 40NR.
Watch Out for Local Taxes
This is where people get tripped up. Alabama doesn't just have state income tax. Several cities—like Birmingham, Gadsden, and Bessemer—levy their own "occupational taxes." These are usually around 1% of your gross pay.
Your employer usually takes this out automatically, but if you’re a contractor or 1099 worker, don't forget about these. The state won't collect them for the city; you have to handle those local jurisdictions separately.
The "30-Day Rule" for Visitors
A new law kicking in for 2026 is the "Safe Harbor" rule. If you don't live in Alabama but work here for 30 days or less, you don't owe Alabama any income tax. This is a massive relief for consultants and traveling nurses who used to have to file a whole state return just because they spent a week in Montgomery.
Actionable Steps for Tax Season
Don't wait until April 15th. Alabama is notoriously slow at processing paper returns, and fraud prevention measures mean even electronic refunds can take 8–12 weeks to hit your bank account.
- Check your Overtime: Look at your pay stubs from July 2025 onward. If your employer didn't resume withholding state tax on your OT, you might owe a surprise balance.
- Verify your Dependents: The income thresholds for the $1,000-per-dependent exemption changed. If your AGI is under $60,000, make sure you're getting the full $1,000 per kid, not the old $300 or $500 rates.
- Go Paperless: Seriously. Use the MAT portal. If you mail a paper check or return to Montgomery, there is a non-zero chance it sits in a mailroom for three months.
- Gather Retirement Documents: If you're over 65, ensure your tax software is updated for the new $12,000 exemption. Not all "big box" software programs catch Alabama’s specific legislative changes immediately.
The state of Alabama income tax isn't the most complex in the country, but the recent sunsetting of the overtime exemption and the rise of the standard deduction mean your 2025 return won't be a carbon copy of 2024. Plan for a slightly different bottom line.