Iowa allows a deduction, in full, for health insurance premiums paid with after-tax dollars. The deduction is allowed even if a taxpayer doesn’t itemize. The definition of “health insurance” includes regular health insurance, dental or vision insurance, and long-term care premiums.
What if the taxpayer is a non-resident of Iowa, who has a filing obligation in Iowa? Can they take the deduction as well?
The answer is yes.
The explanation presents a good chance to look at how Iowa taxes non-residents.
Step 1: Calculate Tax Liability as if a Full-Year Resident
A non-resident of Iowa who files an Iowa tax return starts by filling out the Iowa 1040 as if they were a full-year resident of Iowa. This means the initial amount of Iowa tax is calculated based on a taxpayers’ income and deductions from all sources. The deduction for health insurance premiums would be taken by a non-resident in this step.
Step 2: Determine the Ratio of Iowa Income to Non-Iowa Income
Once the full tax liability is calculated, the next step is to determine how much of the taxpayer’s total income is from Iowa sources.
Step 3: Determine the Non-Resident/Part-Year Resident Tax Credit
Using Form 126, the taxpayer determines the amount of the Non-Resident/Part-Year Resident Tax Credit, which is done by using the ratio calculated in Step 2.
Example:
Joe lives in Nebraska but 10% of his income comes from Iowa sources. His Iowa tax liability on his total income (Step 1 above) is $5,000. His Non-Resident/Part-Year Resident Tax Credit is equal to 90% of $5,000, or $4,500. Put another way, his tax liability to Iowa is $500.
Conclusion
This has been a long-winded way of answering the initial question. Can a non-resident take the deduction for health insurance premiums on their non-resident Iowa tax return? Yes.
