iowa income tax update + hf2317

Governor Kim Reynolds signed the House File 2317 into law on March 1, 2022. Most notably, it included income tax rate reductions and exemptions for retirement income and Capital Gains. 

INDIVIDUAL INCOME TAX RATE AND BRACKET CHANGES 

• 2023 – top rate reduced to 6% (currently 8.53%) 
• 2024 – top rate reduced to 5.7% 
• 2025 – top rate reduced to 4.82% 
• 2026+ – flat tax rate of 3.90% 

RETIREMENT INCOME TAX 

Retirement income for disabled taxpayers and those 55 years or older is exempt beginning in 2023. 

• Governmental or other pensions or retirement pay, including: 
  • Defined benefit or defined contribution plans 
  • Annuities 
  • IRA’s 
  • Plans managed or contributed to by an employer or by a self-employed person as an employer 
  • Deferred compensation plans or earnings attributable to the deferred compensation plan 

CAPITAL GAINS EXEMPTION  

Capital gains from the sale or exchange of stock in a qualified corporation (beginning in 2023).  

• One irrevocable lifetime election for employee-owners of qualified corporations. 
• Employee-owner means an individual who owned the stock for at least ten years and acquired the stock while employed and on account of employment for at least ten cumulative years. 
• Qualified Corporation – at the time of the first sale for which an election is made, must meet these requirements: 
  • The corporation employed individuals in Iowa for at least ten years. 
  • The corporation has had at least five shareholders for the ten years prior to the first sale for which the election is made. 
  • The corporation has had at last two shareholders or groups of shareholders who are not related for the ten years prior to the first sale for which the election is made. 
• Exemption phased in over three calendar years: 
  • 2023: 33% exemption 
  • 2024: 66% exemption 
  • 2025+: 100% exemption 

FARM LEASE INCOME TAX EXEMPTION 

The net income received by a retired farmer 55 years or older under a farm tenancy agreement covering real property if the retired farmer held the property for ten years or more and materially participated in farming for ten years or more. 

FARM CAPITAL GAINS INCOME TAX EXEMPTION  

The bill modifies the farm capital gains income exemption on the sale of real property used in a farming business as well as the sale of cattle, horses, and breeding livestock. It also modifies the qualifying time frame for retired farmers to have materially participated in farm operations. 

R&D CREDIT  

Requires the use of the alternative simplified method for IA if that method was used for Federal. It disallows supplies and computer use expenses as qualified expenses. Also, it reduces the credit refundability by 10% per tax year through 2023, with 50% refundability for tax year 2027 and later years. 

OTHER TAX CREDITS  

The bill reduces the refundability of certain tax credits by 5% each year for five years, starting in 2023, resulting in refundability of 75% beginning tax year 2027. Credits included are Assistive Device Tax Credit, Historic Preservation Tax Credit, Redevelopment Tax Credit, Research Activities Tax Credit, and Third-Party Development Tax Credit. 

CORPORATE INCOME TAX RATE REDUCTION  

The potential tax rate decreases depending on corporate income tax revenue in future years. 

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