Alabama uses a graduated income tax with three brackets (2%, 4%, 5%) and very low thresholds that have been unchanged for decades. Alabama's most distinctive feature is its allowance of a federal income tax deduction - you can deduct the federal taxes you paid from Alabama taxable income, significantly reducing your effective Alabama rate. Important for workers: Alabama's state overtime pay exemption expired June 30, 2025 - overtime is now fully taxable in Alabama. State grocery tax rate: 2.00% (reduced from 3% in September 2025).
State Income Tax
2% – 5.00%
State Sales Tax
4.00% + local
Grocery Tax (state)
2.00%
Alabama Income Tax Brackets 2026
Alabama's three-bracket structure applies to Alabama gross income after subtracting the Alabama standard deduction, personal exemptions, and - uniquely - federal income taxes paid.
Alabama Taxable Income (Single)
Rate
$0 – $500
2.00%
$500 – $3,000
4.00%
Over $3,000
5.00%
Federal tax deduction: Alabama allows you to deduct your federal income tax liability from Alabama taxable income before applying the above brackets, reducing the effective Alabama rate for most taxpayers.
Alabama Overtime Tax - Important 2025 Change
Alabama previously exempted overtime pay from state income tax. That exemption expired June 30, 2025. The Alabama Legislature's 2025 session failed to pass an extension. From July 1, 2025 forward, all overtime wages earned by Alabama workers are fully subject to Alabama income tax at the regular 2%/4%/5% rates.
The federal OBBBA overtime deduction (effective 2025) applies on your federal return but does not reduce Alabama income tax - Alabama uses its own starting point, not federal AGI.
OBBBA Conformity - Alabama Does Not Conform
Alabama uses its own independent tax code. OBBBA deductions (tips, overtime, senior bonus) reduce federal AGI, but Alabama starts from Alabama gross income - not federal AGI. These federal deductions provide no Alabama tax benefit. Alabama has not enacted state-level conformity legislation.
Alabama Grocery Tax
Alabama taxes groceries at the state level. The state grocery rate was reduced from 4% to 3% in September 2023, then from 3% to 2.00% effective September 1, 2025 (Act 2023-554 phase 2). Local city and county sales taxes continue to apply to groceries at full local rates, making the combined grocery tax rate 6–10%+ in many Alabama municipalities.
Alabama Sales Tax
Alabama's state sales tax rate is 4.00%. Local additions range from 0% to 7.5%, giving Alabama one of the highest average combined sales tax rates in the nation. Many Alabama cities and counties also impose occupational taxes on wages earned within their limits - these function as a de facto local income tax for workers in those jurisdictions.
Alabama uses a graduated income tax with three brackets: 2% on the first $500 (single) or $1,000 (MFJ), 4% on the next $2,500/$5,000, and 5% on all income above $3,000 (single) or $6,000 (MFJ). These thresholds have been unchanged for decades. Alabama is unique in allowing a deduction for federal income taxes paid, which significantly reduces the effective Alabama rate for most taxpayers.
Alabama allows a federal income tax deduction - how does that work?
Alabama is one of very few states that allows taxpayers to deduct the federal income taxes they paid from their Alabama taxable income. This deduction reduces the Alabama tax base dollar-for-dollar. For example, if you paid $8,000 in federal income tax, your Alabama taxable income is reduced by $8,000 before applying the 2%/4%/5% Alabama brackets. This makes Alabama's effective income tax rate significantly lower than the headline 5%.
Does Alabama conform to the OBBBA tips and overtime deductions?
No. Alabama uses its own independent tax code (Alabama Code Title 40) and starts from Alabama gross income - not federal AGI or federal taxable income. OBBBA deductions that reduce federal AGI do not flow through to reduce Alabama taxable income. Alabama has not enacted legislation conforming to OBBBA tips or overtime deductions.
What happened to Alabama's state overtime pay exemption?
Alabama had a state overtime pay exemption that allowed hourly employees to exclude overtime pay from Alabama taxable income. That exemption expired June 30, 2025. The Alabama Legislature's 2025 session failed to pass an extension. From July 1, 2025 forward, overtime pay is fully taxable in Alabama at the regular income tax rates. Note: the federal OBBBA overtime deduction applies on the federal return only - it does not reduce Alabama taxable income.
What is Alabama's grocery tax rate?
Alabama's state grocery sales tax rate is 2.00% (reduced from 3% effective September 1, 2025, under Act 2023-554 phase 2). Local city and county sales taxes continue to apply to groceries at full local rates, so the total grocery tax rate can still exceed 9% in high-tax localities. Alabama remains one of the few states that applies a state sales tax to groceries.
What is Alabama's state sales tax rate?
Alabama's state sales tax rate is 4.00%. Local city and county taxes add on top - often 4–7.5% - making Alabama's average combined rate among the highest in the nation. Groceries are subject to the 2.00% state rate (reduced September 2025) plus applicable local rates.
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