2023 Changes to Iowa Individual Income Tax

The starting point for taxation on the Iowa individual income tax return will be federal taxable income. This means that taxpayers will be allowed the same:

• Standard deduction or itemized deduction(s) (subject to Iowa adjustments) as allowed for federal purposes.
• Net operating loss as calculated for federal purposes for losses which are incurred on or after January 1, 2023.

The table below lists the income tax rates which will be in effect for tax years 2023 through 2026. Beginning in tax year 2026, Iowa will have a flat individual income tax rate of 3.9%. The upper and lower limits of the income tax brackets double for married taxpayers who file a joint return.

NOTE: Brackets Double for Married Filing Jointly

Taxpayers will deduct the same NOL as calculated for federal purposes for losses which are incurred in tax year 2023 or later.

For NOLs incurred prior to tax year 2023 and carried forward to tax year 2023 or later:

• Taxpayers will be required to add back the amount of federal NOL carryforward.
• Taxpayers will deduct the amount of Iowa NOL carryforward until it runs out or expires.

The filing status of married filing separately on a combined return will no longer be available.

The deduction for federal taxes paid will be repealed. There will be a one year transition period where federal taxes paid for a previous tax year will be allowed. Here is a summary of the allowed deductions and required additions for tax year 2023:

• The amount of federal taxes paid in tax year 2023 for a prior year federal income tax return (i.e. tax year 2022 and before) will still be allowed as a deduction.
• The amount of any federal estimated income tax payments paid in tax year 2023 for tax year 2022 will still be allowed as a deduction.
• The amount of any federal refund received in tax year 2023 for a prior tax period will be required to be included as income in tax year 2023, similar to prior tax years.

Taxpayers will be allowed to deduct from taxable income the amount of student loan repayments paid by an employer for Iowa purposes.

Payments on any qualified loan for this purpose include:

• Payment made to the taxpayer or to a lender
• Payments of principal or interest

If the taxpayer is eligible for a deduction in computing federal taxable income under section 221 of the Internal Revenue Code for interest paid on a qualified student loan, the taxpayer must recompute the amount of the deduction by subtracting from the deduction the amount of interest that was also deducted for federal purposes.

The additional Iowa health insurance premiums deduction, previously allowed for all taxpayers, will be limited to taxpayers age 65 or older with a net income of less than $100,000.

Similar to previous tax years, this deduction is allowed to the extent that the health insurance is not otherwise deducted in computing federal taxable income. In other words, an additional deduction is not allowed if the same health insurance premiums are deducted as a self-employed health insurance deduction or as an itemized deduction.

In order to determine whether a taxpayer’s net income is less than $100,000 for purposes of this provision, taxpayers are required to add back the following items:

• Pension or retirement income exclusion
• Standard deduction
• Itemized deduction
• Personal exemption deduction
• Qualified business income deduction

Iowa’s Alternative Minimum Tax (AMT) has been repealed. The AMT credit will be allowed in tax year 2023, but cannot be carried forward to another tax year.

Listed below is a partial list of provisions which were not repealed by Senate File 2417:

• Pension exclusion
• Military pay and retirement exclusion
• State tax exempt bond income exclusion
• Federal securities exemption

Qualifying taxpayers will be able to subtract net capital gains from the sale of stock of a qualified corporation.

Single Lifetime Election

An employee-owner is entitled to make one irrevocable lifetime election to exclude net capital gain from the sale or exchange of capital stock of one qualified corporation that was acquired on account of employment by the qualified corporation.

The single lifetime election applies to:

• All subsequent sales or exchanges within 15 years of date of election
• Qualifying capital stock that has been transferred by inter vivos gift from employee-owner to:
  • The employee-owner’s spouse
  • A trust for the benefit for the benefit of the spouse

If the employee-owner dies after selling or exchanging qualifying capital stock without making an election, the surviving spouse or personal representative may make the single lifetime election.

The allowed deduction on qualifying net capital gains for each tax year is identified below:

• Tax years beginning in 2023 - 33%
• Tax years beginning in 2024 - 66%
• Tax years beginning in or after 2025 - 100%

Eligible Capital Stock

For purposes of this provision capital stock means:

• Common or preferred stock
• Voting or nonvoting stock

The term capital stock does not include:

• Stock rights
• Stock warrants
• Stock options
• Debt securities

For purposes of this deduction the taxpayer must be an employee-owner of a qualified corporation. Employee-owner means an individual who:

• Owns capital stock in the qualified corporation for at least 10 years;
• Was employed by the qualified corporation for at least 10 cumulative years; and
• Acquires the capital stock while employed and on account of employment with the qualified corporation

Qualified Corporation

Qualified corporation means, with respect to an employee-owner, a corporation which at the time of the first sale or exchange for which the election is made meets the following conditions:

• Employed individuals in this state for at least 10 years
• Had at least 5 shareholders for the 10 years prior to the sale or exchange
• Had at least 2 shareholders or groups of shareholders who are not related for the 10 years prior to the first sale or exchange

The term qualified corporation also includes:

• An Iowa Affiliated Group
  • Any member of an Iowa affiliated group as long as at least one member of that group employed individuals in this state for at least 10 years.
  • The affiliated group must have made a valid election to file an Iowa consolidated income tax return.
• Corporation that was party to a reorganization that was entirely or substantially tax free.

Eligible taxpayers may subtract, to the extent included, net income received pursuant to a farm tenancy agreement covering real property.

Eligibility

Real Property

• The real property must have been held by the eligible individual for 10 or more years

Eligible Individual

• Must have materially participated in the farming business for 10 or more years
• Must be55 years of age or older or disabled at the time of the election
• Can no longer materially participate in a farming business
• Must be a party to a farm tenancy agreement

Farm Tenancy Agreement

A farm tenancy agreement is a written agreement outlining the rights and obligations of an owner-lessor and a tenant-lessee where the tenant-lessee has a farm tenancy as defined in Iowa Code section 562.1A. A farm tenancy agreement includes:

• Cash leases
• Crop Share leases
• Livestock share leases
• Flexible farm lease

Individuals who elect to exclude income from a farm tenancy agreement shall not claim the following in the year in which the election is made or in any succeeding year:

• Capital gain exclusion
• Beginning farmer tax credit

Married individuals who file separate returns:

• Allocate their combined annual exclusion limit to each spouse in the proportion that each spouse's respective net income from a farm tenancy agreement bears to the total net income from a farm tenancy agreement.

Partnership, S Corporations, Trusts, and Estates

• Not eligible for the election even if net income passes through to an eligible individual.

Net capital gains from the sale of specific farming related property may qualify for the capital gains deduction.

Sale of Real Property Used in a Farming Business

Taxpayers may subtract, to the extent included, the net capital gain from the sale of real property used in a farming business if one of the following conditions are satisfied:

• Taxpayer has materially participated in a farming business for a minimum of 10 years and held real property used in a farming business for 10 years. If the taxpayer is a retired farmer, the taxpayer is considered to meet the material participation requirement if the taxpayer materially participated in a farming business for ten years or more in the aggregate, prior to making the single life-time election.
• The taxpayer has held the real property used in a farming business which is sold to a relative of the taxpayer.

For purposes of this provision a relative is a person satisfying one of the following conditions:

• The individual is related to the taxpayer by consanguinity or affinity within the second degree as determined by common law.
• The individual is a lineal descendent of the taxpayer.
• An entity in which an individual who satisfies one of the conditions above has a legal or equitable interest as an owner, member, partner, or beneficiary.

Sale of Cattle or Horses

• Taxpayer must be a retired farmer
• Must have held for breeding, draft, dairy, or sporting purposes for a period of 24 months or more from the date of acquisition.
• Taxpayer must have materially participated in the farming business for 5 of the 8 years preceding the farmer’s retirement or disability and must have sold all or substantially all of the taxpayer’s interest in the farming business.

Sale of Breeding Livestock, other than Cattle and Horses

• Taxpayer must be a retired farmer
• Must have held the breeding livestock for a period of 12 months.
• Taxpayer must have materially participated in the farming business for 5 of the 8 years preceding the farmer’s retirement or disability and must have sold all or substantially all of the taxpayer’s interest in the farming business.

Retired Farmer

A retired farmer is an individual who is:

• Disabled
• Or who is fifty-five years of age or older
• And who no longer materially participates in a farming business when an exclusion and deduction is claimed

Retired farmer may make a single lifetime election to exclude capital gain from sale of:

• Real Property
• Cattle or horses
• Breeding livestock other than cattle or horses

A retired farmer who makes single lifetime election shall not claim in the year of election or subsequent years:

• Beginning farmer credit
• Exclusion from net income from farm tenancy agreement

Married individuals who file separate returns

• Allocate combined annual net capital gain exclusion to each spouse in proportion that each spouse's net gain bears to the total net gain.

Most Iowa capital gains deductions are repealed including the deductions for:

• The sale of cattle, horses, or breeding livestock, except in the case of retired farmers as described above
• The sale of real property used in a non-farm business
• The sale of timber
• The sale of a business
• The sale of employer securities to a qualified Iowa employee stock ownership plan (ESOP)

However, installments for sales initiated prior to January 1, 2023, will qualify for the capital gains deduction. This means that installment sales which were completed prior to January 1, 2023, and previously qualified for the capital gains deduction will continue to qualify for the capital gains deduction on or after January 1, 2023.

Retirement income will no longer be taxable for taxpayers who are 55 years or older or who are disabled. The Department published a Retirement Income Tax Guidance page which addresses who qualifies for the retirement income exclusion, what retirement income qualifies for the exclusion, and the withholding requirements related to retirement income.