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.
Filing Status Choices
Let’s start by looking at filing status choices.
Married couples can choose from 3 filing statuses on an Iowa tax return:
- Married filing jointly
- Married filing separately on a combined return
- Married filing separately on separate returns
Iowa filing status is not tied to federal filing status. A couple can file a joint federal return but choose to file separate Iowa returns.
Married filing jointly is the filing status most-often used by couples where only one spouse has income. Almost all dual-income couples benefit from filing separately in Iowa.
Iowa Tax Brackets
The reason why it’s usually better for married couples to file separate Iowa returns is because Iowa has just one tax bracket, which applies to all taxpayers and all filing statuses.
In situations where both spouses have income, it’s better to file separately so each spouse is taxed only on their income, rather than combining income and being taxed jointly.
Alex and Angie are married. Alex’s taxable Iowa income is $50,000, Angie’s taxable Iowa income is $30,000. If they file jointly, they’ll be taxed on $80,000 of income in a higher range of Iowa’s highly progressive tax brackets. The tax on $80,000 is $5,303 (using the 2017 tax tables). If they file separately, Alex will calculate the tax on his $50,000 and Angie will calculate the tax on her $30,000 of income. The tax on $50,000 is $2,829; the tax on $30,000 is $1,442. This equals a total tax liability filing separately of $4,271. The savings by filing separately is $1,032.
What’s the Difference Between the 2 “Separate” Filing Statuses?
The difference between the two filing statuses is with liability for the contents of the return. When a married couple files separately but on a combined return, both spouses are jointly liable for the contents of the return. When a married couple files completely separate returns, each spouse is liable only for the contents of his or her return.
The total tax liability will be the same under either of the separate statuses.
Going back to our example above of Angie and Alex, if they file separately on a combined return, their total tax liability is $4,271. If they file separately on separate returns, they’ll still arrive at $4,271 of total tax liability. The only difference is with liability for that tax. On a combined return, they’re both liable for the total amount. On separate returns, Alex would be liable for his $2,829 liability and Angie would be liable for her $1,442 liability.
The remainder of this series of posts will go through selected lines of the Iowa 1040 and related schedules, laying out the differences between married filing jointly and married filing separately.