TAX TIP – IOWA INDIVIDUAL INCOME TAX CHANGES
A brief summary of significant Iowa individual income tax changes taking effect for tax year 2023 follows:
- Tax rate – the highest individual income tax rate will decrease from 8.53% for the 2022 tax year to 6.0% for the 2023 tax year. The individual income tax rates will continue to decrease in subsequent years until the 3.9% flat tax rate will take effect for the 2026 tax year.
- Retirement income exclusion – for individuals age 55 or older, retirement income will no longer be subject to state income tax beginning in tax year 2023. The exclusion also applies to surviving spouses or other survivors who have an insurable interest in an individual that would have qualified for the exemption. Retirement income includes distributions from IRA’s, defined contribution or defined benefit plans (for example 401(k) and pension plans), and from annuities.
- Retired farmers – starting in tax year 2023 retired farmers are required to choose which of the two options listed below best fit their business needs. For purposes of this provision, a retired farmer is an individual that materially participated in a farming business for at least ten years:
- Excluding rent income – rent income must be from real property and cannot be received as an owner/beneficiary of a pass-through entity. A retired farmer that elects to exclude rent income is not eligible to exclude capital gains from income and is also not eligible to claim the beginning farmer tax credit in the current or future tax years.
- Excluding qualifying capital gains from income.
- Federal tax deductibility – the ability to deduct federal income taxes paid is eliminated beginning with the 2023 tax year.
The above is a brief summary of the significant provisions taking effect in 2023. If you have any questions regarding the tax law changes, how the changes impact you, or for a more detailed discussion of the Iowa individual income tax law changes, please contact our office.