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.
(This presentation is broken into a series of “Issues.” These are issues 8, 9 and 10.)
Issue 8: Moving Expense Deduction for Moves Into Iowa
This is another deduction where Iowa throws curveballs when people file separate tax returns. The rule here is:
- The deduction must be divided between the spouses based on earned income received after the move to Iowa. BUT ….
- If one spouse can show that the move was made just for that spouse, that spouse can take 100% of the deduction
Issue 9: Student Loan Interest
The tuition and fees deduction is taken by the spouse who the deduction is tied to. The deduction is limited to $2,500 total, same as on the federal return. If both spouses have student-loan interest, they can each deduct their share of the interest; the total deducted cannot exceed $2,500.
Alex has $2,000 of student-loan interest; Angie has $1,000 of student-loan interest, so they had a total of $3,000 of interest. On their joint federal tax return, they claimed the maximum deduction of $2,500. How is this allocated on their separate Iowa tax returns?
Alex gets two-thirds of the $2,500 (he had $2,000 of the $3,000 of interest). $2,500 x 2/3 = $1,667. Angie gets the remainder, $833.
Let’s say Alex had $1,500 of interest while Angie had $1,000. In this case, since the total amount being claimed is not more than the maximum of $2,500, no allocation is necessary; Alex will deduct $1,500 and Angie will deduct $1,000.
Issue 10: Adjustments to Income Relating to a Dependent
When an adjustment to income relates to a dependent (such as a tuition deduction), and the taxpayers are filing separate returns, that deduction is allocated between the spouses based on net income not including the adjustment being allocated.
Alex and Angie are married and filing separate Iowa tax returns. They claim their college-aged son as a dependent and take a $2,000 deduction for their son’s tuition on their federal tax return. In order to allocate the tuition deduction on the Iowa return, Alex and Angie will look at their net Iowa income without considering the tuition deduction; whatever that net-income ratio comes to will be how they’ll allocate the tuition deduction.
WARNING: this example uses the deduction for college tuition WHICH IS NOT CURRENTLY AVAILABLE ON IOWA TAX RETURNS (FOR 2016 AND 2017) AS IOWA DID NOT “COUPLE” WITH FEDERAL LAW THOSE YEARS.