As of March 12, 2024, at least nine states proposed legislation to exempt overtime pay from income tax, following similar 2023 Alabama legislation that took effect January 1. The concept of a tax exemption for overtime pay would be surprisingly complex for employers, taxpayers, and state tax authorities to administer. Proposals to exclude overtime pay from income tax should undergo a careful assessment of administrative complexity and control. Unless carefully defined, these proposals could add substantial complexity to tax administration, and the effect on state revenues could be much higher than intended.

As noted in one legislative fiscal estimate, “state tax authorities do not receive any data to independently determine overtime hours/pay or to distinguish such earnings from other earnings. This limits the ability of the department to adequately administer an exemption.”

Several questions and issues may not be apparent to lawmakers and stakeholders. This article is intended to explain the practical implications of these proposals and offer recommendations.

Link to full article in Tax NotesState – https://taxnotes.co/3PitwAx.