November 26, 2019
Iowa is beginning a transformation back to conforming with the federal tax code to determine Iowa income taxes. For tax year 2019, some major steps along the way are phasing in or becoming fully compliant. Iowa tax instructions are found here.
Some of the Iowa changes implemented for tax year 2019 that differ from 2018 are:
- Iowa tax rates are reduced in 2019. There are still 9 tax brackets, but now ranging from 0.33% to 8.53%.
- While the Iowa and federal Section 179 limits are still different, Iowa has increased the allowable “fast write-off” of equipment to $100,000 in 2019 (federal is $1,020,000 in 2019). In 2020 and beyond, Iowa will fully comply with the federal limits then in effect. Bonus depreciation is not allowed for any Iowa taxpayer.
- The Domestic Production Activities Deduction is repealed after 2018.
- Iowa taxpayers may deduct 25% of the federal amount of Section 199A Qualified Business Income Deduction in 2019 and 2020.
- Like-kind exchange treatment under former Section 1031 for personal property trades is not mandatory in 2019 (it was mandatory in 2018), but is allowed on a trade by trade basis if the taxpayer elects. Iowa will fully comply with federal rules beginning in 2020.
- General compliance with federal rules, such as elimination of the moving expense deduction, miscellaneous itemized deductions, and business entertainment deductions. However, state (other than Iowa) and local income taxes as an itemized deduction are not limited on Iowa returns to $5,000/10,000.
- Unless there is legislation in the 2020 session, Iowa will keep the medical expense deduction floor at 10%, and otherwise not comply with the other ‘extenders’ President Trump signed on December 20, 2019.
From 2015 through 2019, Iowa has not automatically conformed with federal tax law changes. (That fact has caused many a grey hair on Iowa CPAs.) Beginning in 2020, Iowa will again adopt “rolling conformity”. That is, unless the Iowa legislature passes a law, federal tax law changes in the future will automatically apply to Iowa.
Most states with individual income taxes begin with either federal Adjusted Gross Income or federal taxable income, and make adjustments to determine state taxes. Until at least 2023, Iowa begins with gross income and makes adjustments and allowances to the federal tax rules before determining the amount of income subject to Iowa tax. Some of the Iowa differences from federal include:
- Iowa allows a deduction for federal income taxes paid in the year, and taxes federal refunds received (if deducted from Iowa in the prior year).
- Iowa allows a personal tax credit based on household size and composition.
- Bonus depreciation is not allowed for Iowa purposes, and there is no current law that will ever allow bonus depreciation for Iowa taxes.
- Iowa doesn’t tax Social Security, railroad retirement or US military retirement benefits.
- Iowa allows full deduction of after-tax health and long-term care insurance premiums.
- Iowa excludes certain types of capital gains from income.
- Iowa allows a limited exclusion for certain pension income.
- Iowa has different rules regarding mandatory carry-backs of NOLs.
If certain state tax revenue dollar and growth limits are met, Iowa will eliminate the above, and make federal taxable income the starting point for the determination of Iowa taxes. This change will not become effective before 2023, and will not occur until the revenue targets are met. If this occurs, Iowa tax rates will be dramatically cut, and the number of tax brackets will be reduced from 9 to 4.
Note: Iowa had not published 2019 forms or instructions at the time this page was created.