This post will focus on the “low-income exemption” on Iowa tax returns, and how various adjustments to Iowa income play into the exemption calculation.
Iowa taxes start with federal income and then require various adjustments for the Iowa tax return. The end result of these adjustments is “Iowa Net Income” on line 26 of the Iowa 1040. If a taxpayer’s net income is below certain thresholds, they might not need to file a tax return.
Those thresholds are:
- Single and under age 65: net income $9,000 or less
- Single and over age 65: net income $24,000 or less
- Married and under age 65: net income of $13,500
- Married and over age 65: net income of $32,000
- Single, any age and claimed as a dependent by someone else: $5,000
A big key here is the adjustments that need added into net income to make the threshold determination.
To determine if a taxpayer meets the low-income threshold, you follow these steps:
- Start with net income from line 26 of the Iowa 1040
- Add back the pension exclusion
- Add back “reportable Social Security benefits”
- There’s also an addback for lump-sum distributions from Form 4972, but I can say in 10 years in practice I’ve never seen this form
- Any net operating loss carryovers deducted in the current year must be added back as well
Angie and Alex are married and both are over age 65. Together they have $5,000 of dividend income, a $4,000 pension and together have Social Security benefits of $28,000. Do they need to file an Iowa tax return?
Let’s walk through the steps.
- Their Iowa net income would be $5,000, calculated as follows: $5,000 dividend income plus $4,000 pension, minus $4,000 pension exclusion = $5,000 of Iowa net income
- Now we add back the pension exclusion, so add the $4,000 back to net income — $4,000 plus $5,000 = $9,000.
- We then have to determine if any of their Social Security benefits need to be counted in this calculation. Remember from this post: “reportable” SS benefits in Iowa are calculated as 1/2 of total SS benefits, plus other income, and then compared to a threshold amount. For Angie and Alex, 1/2 of their SS benefits equals $14,000. Then add $9,000 to that = $23,000. The threshold amount for a married couple is $32,000, meaning their “reportable” SS benefits in Iowa are $0. So this step comes to a big 0.
- Form 4972 does not apply, so this is 0.
- They have no NOL, so this is also 0.
Add up the amounts on each step and you get $9,000, well below the $32,000 threshold for a married couple over age 65. Angie and Alex are low-income exempt and are not required to file an Iowa tax return.
Let’s say Angie and Alex sold some stock and had a $25,000 capital gain. This changes the calculus.
- Iowa net income would now be $30,000
- Adding back the pension exclusion gets us to $34,000 on this step
- Angie and Alex now have some reportable SS benefits, calculated as: 1/2 of their total SS benefits = $14,000, plus their other income of $34,000 = $38,000. This is above the $32,000 threshold, by $6,000. When someone is over the SS threshold, you continue the calculation by taking 1/2 of the excess above the threshold amount. In this case, 1/2 of $6,000 = $3,000. So $3,000 goes on this line. (Aren’t Iowa taxes great?!?!) Add the reportable SS benefits to the $34,000 amount from step 2, which puts Angie and Alex at $37,000.
- $37,000 is above the $32,000 filing threshold for a married couple over age 65, so Angie and Alex would need to file a tax return.