Iowa Flat Tax law

Iowa Flat Tax law and How it Affects Retirees

Knowledge is power. Keeping up to date on the latest state legislations won’t only allow Iowans to plan their finances more effectively, but it will also help you make smarter money moves on the road to retirement. Here’s what you need to know about the recent Iowa Flat Tax law change and what it means for your golden years. 

In March of 2022, a new Iowa tax reform was signed into law that will do away with Iowa’s complex income tax brackets and apply a flat tax. In addition to that change, there is also drastic reduction in tax rates on retirees with the exclusion of IRAs, pensions, and annuities from taxable income in the state of Iowa.

The new law will also make Iowa the third state to allow taxpayers to deduct their state and local property taxes from their federal incomes taxes. This is a step closer for Iowa where it’s possible for its residents to live entirely off their Social Security benefits without paying any income tax at all.

Here’s what you need to know about the new tax law and how it can impact you.

Cutting Individual Income Taxes

In order to keep more of the money you earn, the state of Iowa has proposed a 3.9% flat individual income tax rate. This tax rate is projected to save taxpayers more than $1.67 billion by tax year 2026.

When fully enacted in 2026, 98% of Iowa taxpayers with $10,000 or more of taxable income will benefit from a decreased tax liability. The plan also includes four tax brackets ranging from 4.4% to 6.0%. In subsequent years, these rates will be eliminated until a 3.9% flat tax rate is achieved in 2026.

A 3.9% flat tax will not result in low-income Iowans paying more; low to moderate-income earners who qualify for the Federal Earned Income Tax Credit (EIC) and other available tax credits will continue to receive a state tax refund when credits exceed state tax liability.

Fully Repeal State Taxes on Retirement Income

Many of Iowa’s seniors have worked hard, saved for retirement and paid their fair share in taxes. They deserve a break to enjoy what they’ve earned. 

Governor Kim Reynolds has proposed a new Retirement Income Exemption for Iowa seniors age 55 and older beginning in 2023. This exemption would eliminate state tax on retirement income from individual retirement account (IRA) distributions, taxable pensions and annuities. An estimated 294,624 Iowa taxpayers will see their retirement tax liability eliminated in 2023. 

Additionally, farmers aged 55 or older who have farmed for at least 10 years but have retired from farming operations will be able to elect an exemption of income from either cash rent or farm crop shares for all years the income is earned; or elect one lifetime election to exclude net capital gains from the sale of farmland.

Capital Stock Exemption

Iowa has a reputation for being friendly to small businesses. It’s no wonder, then, that the state’s capital stock investors have grown fond of their employee stock ownership plans also known as ESPOs.

ESOPs are defined as a qualified corporate or employee stock ownership plan. They allow employees to own shares of the company they work for, which can be purchased by the employer or sold back to it at fair market value.

Under current law, Iowans who are awarded capital stock from their employers currently pay all or some of the net capital gains taxes on those shares when they choose to sell them. This is because 50% of net capital gains from an ESOP are allowed for deduction. The proposal would allow 100% of the net capital gains to be deducted.

Qualified corporations must have done business in Iowa for a minimum of 10 years. Employee owners must have acquired capital stock while employed by the corporation for at least 10 years.

Corporate Income Tax Reform

The state of Iowa is in a unique position when it comes to corporate tax rates. Corporate tax levels directly affect economic activity in states, and those with more competitive structures and rates are in much better positions to grow existing businesses and attract new ones. 

Just a few years ago, Iowa’s rate was the highest in the country, but recent reforms have improved our national standing. Through continued common sense, pro-business strategies, Iowa can help maximize its competitive advantage by offering businesses an opportunity to reduce their tax rate when they increase their revenue in Iowa.

Here’s how it works: For every fiscal year in which net corporate income tax receipts exceed $700 million, the surplus will be used to buy down the current top rate. Following the close of the fiscal year, the Department of Revenue will determine the new top corporate income tax rate and apply it effective January 1 of the following tax year.

New top rates will be determined each fiscal year that net corporate income tax receipts exceed $700 million, until a uniform 5.5% corporate income tax rate is achieved, at which time it would be capped. Once the rate is capped, excess tax revenue beyond $700 million will go into the state’s general fund.

Last Thoughts

You’ve been working hard for a long time. You want to be able to kick back and enjoy life—but you also want to help ensure that if something happens, your family will be taken care of. If you’re looking for an experienced financial advisory firm that can provide income planning with the utmost level of care and professionalism, look no further. Johnson Wealth and Income Management is here to help you every step of the way.

Whether you’re living in northern Iowa or Southern Minnesota, our Fiduciary advisors are ready to help you take charge of your financial future. We’re proud Iowa residents with offices in both Humboldt and Clear Lake – which is why we’re excited to see that Clear Lake has been voted the #1 place to live in Iowa and Humboldt has been voted the #4 places to live in Iowa!

From new state legislations to retirement planning tips, if you’re looking for a knowledgeable, friendly atmosphere and personalized service, we’re confident that you’ll feel right at home when you step through our doors. For more information contact us today.

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