Iowa’s taxation of married couples has quirks that can throw a taxpayer or tax preparer for a loop. For example, Iowa has 3 different filing statuses a married couple can choose from, and most deduction items are allocated pro rata between spouses who file separately. This results in situations where “common sense” would say one thing but Iowa’s tax law says something else.
We’ll discuss these quirks in a series of blog posts over the coming months. These posts are excerpts from a CPE presentation I give to tax professionals on this topic.
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(This presentation is broken into a series of “issues.” These are Issues 14 and 15.)
Issue 14: Itemized Deductions
Unlike on federal returns, where separate filers can take itemized deductions based on who paid the expense, Iowa requires separate filers to allocate itemized deductions based on Iowa net income. This is true even if one spouse made 100% of the itemized deduction payments out of his or her own separate funds.
Issue 15: Tuition & Textbook Credit, Iowa Child and Dependent Care Credit/Early Childhood Development Credit, and Iowa EIC
Tuition & Textbook Credit
Iowa allows a tax credit of up to $250 for the purchase of school supplies and payment of school-related fees for dependents in K-12. The credit can only be claimed by the spouse claiming the dependent. Compare this to the two following credits, where the credit must be allocated between the spouses, regardless of who claims the dependent.
Iowa Child and Dependent Care Credit
The credit for this item on the Iowa return is based on a combination of: the taxpayer’s federal credit amount from Form 2441, and their Iowa net income. Regardless of who claims the child to whom the daycare expenses relate, the combined net income of both spouses must be used in calculating the credit. Once the credit amount is determined, it is allocated between the spouses based on their net Iowa income.
Early Childhood Development Credit
This credit is available for expenses paid for preschool expenses for kids ages 3-5. The credit amount is 25% of the first $1,000 of expenses (so $250 maximum credit). Regardless of which spouse claims the child to whom the expenses relate, the credit must be allocated between the spouses based on net Iowa income.
Iowa Earned Income Credit
The Iowa EIC is 15% of the taxpayers’ federal EIC. For married taxpayers filing separate Iowa returns, the EIC must be allocated based on each spouse’s share of earned income NOT net income.
NOTE: the EIC can only be taken on the Iowa return if it was taken on the federal tax return. If couples are filing separate federal returns (where the EIC wouldn’t be available), they can’t claim the EIC on the Iowa return even if their income falls within EIC range.