On March 1, 2022, Governor Kim Reynolds signed House File 2317 into law. 

The new law reduces state income taxes substantially benefitting retired individuals, farmers and individuals in the higher income tax brackets.  It raises taxes on individuals in the lower income tax brackets. 

Retirement Income

Beginning in 2023, Iowa will no longer tax 401(k)s, pensions and IRAs owned by disabled Iowans or those 55 years of age or older. Good planning suggests that if any qualifying individual had plans to take a discretionary distribution from a retirement plan this year (other than a required minimum distribution), waiting until January 1, 2023, or later would make a lot of sense.

Farmer Benefits

Beginning in 2023, Iowa will not tax a farmer who is disabled or 55 years of age or older, and has materially participated in the farming operation for ten years, on cash rent, crop share or livestock share lease income, if elected by the farmer. If the election is made, the farmer forgoes any current or future capital gain exclusion on the sale of such farmland and any beginning farmer tax credit.  The latter seems irrelevant since a retired farmer with 10 years of material participation would likely not qualify for a beginning farmer tax credit. The exclusion is not available if the farmland is owned by a partnership, LLC or S-corporation.

The Coveted Flat Tax

Apparently, multiple tax brackets or so confusing and complicated that the legislature decided that they had to change it. Currently, for tax years beginning prior to Jan. 1, 2023, there are nine tax brackets with the lowest rate at 0.33% and the highest marginal rate at 8.53%. Those brackets were scheduled to be reduced to four with a highest marginal tax rate of 6.5% beginning Jan. 1, 2023. The new Iowa law reduces the number of brackets over the next four tax years and schedules a phase-in of a flat 3.9% tax rate. The lowest three income brackets will see an increase in taxes; the six highest income brackets will see a significant decrease in taxes.

Shareholder Attorney David Repp practices primarily in the area of taxation. For more information on his practice, click here