Alabama tax return changes for 2026

ADOR’s executive summary (October 31, 2025, updated November 10) says Alabama conforms to certain federal provisions on a rolling basis, and then marks each provision Yes or No. Individual income tax starts from Alabama adjusted gross income rather than federal taxable income, which is why several of the new below-the-line federal deductions do not carry over.

• Tied to federal: 100% bonus depreciation, the higher Section 179 limits, Section 174A domestic research expensing, the Section 163(j) change for individuals and corporations, and the SALT cap change.
• Not tied: the qualified tips deduction (federal maximum $25,000), the qualified overtime deduction and the senior deduction.
• Vehicle loan interest is tied to federal, with Alabama authority in section 40-18-15. The federal cap is $10,000 a year.

The 2025 booklet lists a deduction for interest on loans for new qualified vehicles for 2025 through 2028, an expanded military exemption for deployed or activated Guard and Reserve members, and an exclusion for net capital gains from exchanging precious metal bullion.

Business clients may qualify for the new credits on Schedule OC: the Alabama Workforce Housing Tax Credit, the Childcare Facility Tax Credit, the Employer Tax Credit for employee childcare assistance and the Employer Provider Credit.

Alabama’s state exemption for overtime wages ended on June 30, 2025, so overtime paid after that date is taxable. For the months it applied, ADOR told employers to show exempt overtime in Box 14 of the W-2 labelled "EX OT WAGES" and to leave it out of Box 16. Check client W-2s for that label before you assume all wages are state-taxable.

Sort Alabama clients into three groups: hourly workers with 2025 overtime, buyers of new vehicles financed in 2025, and businesses placing assets in service. Each group needs a different document request. HelloBooks keeps fixed asset purchases and loan interest in their own accounts once your team has set them up, so the depreciation and interest figures come from a report rather than a statement hunt. Our Alabama sales tax guide is at /us/sales-tax/alabama.