Iowa is instituting significant changes in the way individual income taxes are calculated beginning in tax year 2023. The Iowa Department of Revenue has posted a summary page of the changes. We will note some of the more impactful and widespread changes below. These changes are for the tax return you file this year.
- The individual income tax forms have been completely revised
- The starting point for calculating Iowa taxable income will be federal taxable income
- You must use the same filing status for Iowa as you do on your federal return
- Iowa no longer allows a deduction for federal taxes paid (a transitional rule is in effect for 2023)
- Most taxpayers can no longer deduct their after-tax health insurance premiums
- Iowa will no longer tax most types of retirement income
- Most of the former capital gain exclusions are eliminated
- Excluded retirement income may include farm lease payments (see Elections below)
There are tremendous potential changes for retired farmers in 2023. Our friends at Iowa State University Center for Agricultural Law and Taxation have written a post that describes these changes.
Since this is all new, there are many, many questions to be answered. The form to elect exclusion of farm rental income is 5 pages long! It requires many details that will take quite of bit of effort to compile. Among all of the other qualifications, a written lease is required. Income from partnerships or S-Corporations are not eligible for exclusion.
Most importantly, the election to exclude farm rental income or certain capital gains is irrevocable and for the taxpayer’s lifetime. Kristine Tidgren notes in her blog post
When filing their 2023 returns, retired farmers who rent real property or sold qualifying livestock or real property used in a farming business will have to decide whether they want to make a single lifetime election to exclude the rental income or the capital gain. They may also choose to make no election, thereby reserving the right to make an election in future years. If a retired farmer does not make an election, they must include the capital gain or rental income in their Iowa taxable income for 2023. Once a retired farmer makes an election, it may not be changed. A retired farmer who has excluded farm rental income from Iowa taxation may not ever take the Iowa capital gain deduction. Conversely, a retired farmer who has made an election to exclude capital gain may not ever exclude income from a farm tenancy agreement. If either election is made, the retired farmer may not take the beginning farmer tax credit in the current or subsequent tax years.
Kristine tidgren
The individual income tax brackets are being consolidated and the top rates reduced over a four year period, as shown in the table below. The upper and lower limits of the income tax brackets double for married taxpayers who file a joint return.
| Income Tax Brackets | Rates | ||||
|---|---|---|---|---|---|
| Lower Limit | Upper Limit | TY 2023 | TY 2024 | TY 2025 | TY 2026 |
| $0 | $6,000 | 4.40% | 4.40% | 4.40% | 3.90% |
| $6,001 | $30,000 | 4.82% | 4.82% | 4.82% | 3.90% |
| $30,001 | $75,000 | 5.70% | 5.70% | 4.82% | 3.90% |
| $75,001 | And Over | 6.00% | 5.70% | 4.82% | 3.90% |
| NOTE: Brackets double for Married Filing Jointly | |||||
The consolidation of tax brackets, combined with the use of federal taxable income as a starting point, will significantly impact Iowa’s individual income taxes this year. As with any tax changes, there will be both “winners” and “losers” compared to the previous taxing regime.
Starting with federal taxable income means a much larger standard deduction than in prior years. This huge deduction increase will sharply reduce the number of taxpayers who will itemize deductions on their Iowa returns. In our firm in 2022, only 9.55% of Iowa filers itemized deductions on their federal return but 51.62% filed the Iowa itemized deduction form. That Iowa form will no longer be necessary in 2023.
The reduction of the top tax rate from 8.53% in 2022 to 6.00% in 2023 will reduce the tax burden for some higher-income filers. It is unclear how the reduction in the number of tax brackets from nine to four will affect low- and middle-income taxpayers this year.