Iowa allows taxpayers to exclude some or all of their retirement income under certain circumstances. Here are the basics:
ONE: Exclusion Amount is $6,000 for Unmarried Taxpayers, And $12,000 for Married Taxpayers
The $6,000/$12,000 amounts represent the maximum that can be excluded. We’ll come back to this topic in the examples later on in this post.
Two: The Taxpayer Receiving the Retirement Income Must Be Age 55 or Older, Disabled, Or Receive the Withdrawal from Certain Deceased Individuals
If the taxpayer is over age 55 at the end of the year, or disabled, they qualify for the exclusion. Note that this rule is different from federal rules regarding the 10% early withdrawal penalty, which is a federal concept. A taxpayer can be subject to the early withdrawal penalty on their federal return while still qualifying for the pension exclusion in Iowa.
Example: John is single, age 58, and receives a $5,000 distribution from his IRA. Because he’s under age 59 1/2, John will probably be subject to the 10% early withdrawal penalty on his federal tax return (unless he qualifies for some other exception). But John can exclude the entire $5,000 withdrawal from taxation in Iowa because he’s over age 55.
As for distributions received from an account belonging to a deceased individual: a surviving spouse, or the son, daughter, mother or father of the deceased can take the exclusion if the deceased person would have qualified for the exclusion themselves.
Example: John is married to Mary. John is 58; Mary is 50. John dies and Mary receives a distribution from John’s IRA. Mary qualifies for the exclusion, because 1) John was her spouse, and 2) John was over age 55 when he died, meaning he would have qualified for the exclusion himself.
In Part 2, we’ll look at scenarios involving married couples, including: situations where one spouse is over age 55 and the other is under age 55 and both have retirement income, and how to allocate the exclusion when a married couple files separate Iowa returns.