Iowa Taxes: Filing Separately and Allocating Dependents

Over Memorial Day week, I re-published some popular old blog posts. One of those posts was about Iowa taxes and the “married filing separately” filing status.

In Iowa, married filing separately has some oddities. For example, itemized deductions must be allocated based on income ratios. This is a different concept from filing separately on a federal tax return, where itemized deductions are either split 50/50 or allocated to the spouse who actually made the payment.

The income ratio comes into play time and again on an Iowa tax return for a married couple filing separately. The pension exclusion, and even the deduction for federal estimated tax payments, all key off the income ratio.

Robert Flach at the Wandering Tax Pro Blog had a question for me: how are dependents allocated on a married filing separately return in Iowa?

The answer is, it depends.

In general, a typical married couple can allocate the dependency exemptions in whatever manner they choose. In general, the allocation won’t make a difference in the final, total tax liability of the couple because the dependency exemption gives a $40 tax credit (non-refundable) and nothing else.*

(*-there is a “textbook credit” available for K-12 school supply expenses, and possibly a daycare credit for people who’s income is below certain thresholds. But the point is, a dependency exemption on an Iowa tax return conveys far fewer monetary benefits than on a federal tax return.)

If the couple files separate Iowa returns and lived apart during the year or has something “funky” going on, then the couple would need to refer to the federal rules for determining who can claim the kids. (The instructions to the Iowa 1040 refer people to Publication 17 for determining dependency exemptions.)

But for your typical married couple filing an Iowa tax return, the dependents can be allocated in whatever way the couple chooses.