This study delves into the electronic, magnetic, and optical properties of Tm‐doped wurtzite AlxGa1−xN alloys, utilizing first‐principles density functional theory (DFT) calculations. By applying the LSDA+U approach to capture the strong correlation effects of 4f‐Tm electrons, our findings reveal that Tm‐doped AlxGa1−xN exhibits semiconducting behavior with inherent ferromagnetic order. Remarkably, the bandgap of Tm‐doped AlxGa1−xN transitions from indirect to direct at an Al content (x) of 0.25, highlighting its potential for dual electrical and magnetic functionalities. The magnetic moments are highly localized at Tm sites, suggesting the feasibility of Tm as a dopant for developing AlGaN‐based diluted magnetic semiconductors. Moreover, the observed spin‐dependent characteristics and magnetic interactions in Tm‐doped AlxGa1−xN underscore its applicability in spintronic devices, including spin transistors and spin logic circuits, which could significantly advance next‐generation electronic systems. Additionally, the study predicts a blue shift in luminescence for Tm‐doped AlxGa1−xN, which is attributed to the interplay between Tm dopant energy levels, Al composition, and the host alloy's band structure, as well as energy transfer and quantum confinement effects. This positions Tm‐doped AlxGa1−xN as a promising material for applications in solid‐state lighting, displays, lasers, and other optoelectronic devices requiring blue light emission.