Retirees provide countless hours of volunteer service and contribute to the culture of Iowa. Eliminating their retirement income taxes will encourage them to remain in the state.
Last year, the Iowa Legislature passed an historic tax reform measure covering a variety of income sources. This legislation was not only the largest tax cut in Iowa history, but also the most comprehensive tax reform in the entire nation.
A flat 3.9 percent income tax will replace the progressive nine-bracket income tax rate system by 2026. The corporate tax will also shrink gradually, until it reaches a flat 5.5 percent. On top of these reforms, retirement income will become exempt from taxation starting this year. Although it is perhaps difficult for some Iowans to believe, our state will no longer tax retirement income.
“Beginning in tax year 2023, the tax liability for nearly 295,000 Iowa taxpayers will be eliminated under the retirement provision of this new tax law,” stated Governor Reynolds. This reform will not only allow more retired Iowans to keep their hard-earned income, but by doing so, also encourage them to remain in the state. Iowa continually loses retirees to other states, especially Florida and Arizona, which promise better tax codes on top of their warmer climates.
Iowa’s Department of Revenue recently released guidance to clarify some of the questions surrounding the new policy. Taxpayers will qualify if the they are:
For married couples, the exclusion applies only to the retirement income of a spouse who meets one of the above conditions. For example, if one spouse retires before the age of 55, the exclusion would not apply just because the other spouse is over that threshold or disabled.
The Department of Revenue also confirms the retirement income exclusion covers “governmental or other pension or retirement plan[s] including defined benefit or defined contribution plans, annuities, individual retirement accounts, plans maintained or contributed to by an employer, or maintained or contributed to by a self-employed person as an employer, and deferred compensation plans or any earnings attributable to the deferred compensation plans.”
More specifically, the following are exempt from taxation:
Iowa joins 12 other states that currently do not tax retirement income. These include nine states that don’t tax individual income of any kind, as well as Illinois, Mississippi, and Pennsylvania, which do not tax income from 401(k) plans, IRAs, or pensions.
Retirees are the foundation of many communities across Iowa. They provide countless hours of volunteer service and contribute to the culture of Iowa. Eliminating their retirement income taxes may not prevent some from seeking to escape our cold winters, but an improved tax climate will give them reason to stick around for the rest of the year.