This blog post is about the Iowa Form 130, which Iowa residents use to claim a credit on their Iowa tax return for taxes paid to another state.
The calculation on Form 130 is straightforward, but there are a few things to be aware of.
7-Step Process
Step 1: Figure out the amount of gross income that was taxed by both Iowa and the other state. If you received a W-2 showing wages paid in the other state, this part is easy; just use whatever the W-2 shows.
Step 2: Figure your total gross income in Iowa. This is found on line 15 of the Iowa 1040. Warning: the amount on this line will likely be different from your federal AGI. Iowa AGI is NOT necessarily the same concept as federal AGI.
Step 3: Divide Step 1 by Step 2 to get a percentage.
Step 4: Figure your total Iowa tax, minus non-refundable credits. This is found on line 51 of the Iowa 1040.
Step 5: Multiply your Iowa tax (Step 4) by the percentage on Step 3.
Step 6: Determine how much tax was imposed on you by the other state. Warning: this is NOT the amount of tax that was withheld from your W-2. This line wants to know the actual amount of tax owed to the other state.
Step 7: Determine your credit by using the SMALLER of Step 5 or Step 6.
Example:
Joe is an Iowa resident. He’s single and made $50,000 at his job in Iowa. He also worked part-time in Nebraska and made $10,000. For the sake of simplicity, let’s say his Iowa gross income was just those two numbers added together, so $60,000.
His percentage on Step 3 is 16.67%.
Let’s say his total Iowa tax was $4,000. (NOTE: I’m using a made up number here for the sake of simplicity.)
Let’s say his total Nebraska tax was $500. (Again, I’m using a made up number here for the sake of simplicity.)
For Step 5, take $4,000 times 16.67% = $667
His Step 6 Nebraska tax was $500.
Joe’s allowable credit for taxes paid to Nebraska is the smaller of Step 5 or Step 6; in this case it’s Step 6, $500.