Iowa Taxes and Married Filing Separately, Issues 4 and 5: Capital Losses and IRA Deductions

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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. T


(This presentation is broken into a series of “Issues,” with this post covering Issues 4 and 5.)

Issue 4: Dealing with Capital Losses

Iowa follows federal law in that only $3,000 of capital losses are deductible each year. Here’s how this works when couples file a joint federal return but separate Iowa returns:

  • If both spouses have losses: the maximum amount of loss that can be deducted between the two spouses is capped at $3,000
  • If the spouses own some capital assets separately and some jointly, and there’s a  mix of gains and losses, the following 2 rules apply: 1) each spouse is limited to a $1,500 loss deduction PLUS any unused portion of their spouse’s $1,500 loss limitation; 2) if the couple filed a joint federal return, the total amount shown for capital gain or loss must equal what was shown on the federal return.

Example 2:

Angie has a capital loss of $2,000 from the sale of stocks she owns 100%. Alex (Angie’s spouse) has a loss of $1,400 from the sale of stocks he owns 100%. They filed a joint federal return showing a $3,400 capital loss (with $400 carrying forward to next year).

On their separate Iowa returns, Angie is limited to a $1,500 loss deduction PLUS any unused portion of Alex’s $1,500 limit. In this case, Alex has $100 left on his limit, since his loss totaled $1,400. Angie will take a loss deduction of $1,600, while Alex will take a loss deduction of $1,400.

The total deduction equals $3,000, same as on their federal return.

Issue 5: IRA Contribution Deduction

In cases where both spouses have earned income, and both spouses made contributions to an IRA, the deduction for those contributions is taken by the spouse making the contribution.

The issue gets more clouded when one spouse makes an IRA contribution on behalf of the other spouse.

For example, federal law allows a working spouse to make an IRA contribution on behalf of a spouse without earned income, effectively doubling the maximum IRA contribution (the working spouse can put in $5,500 for themselves [or $6,500 if over age 50] plus $5,500 [or $6,500] on behalf of their spouse).

But what if the other spouse has some earned income of his or her own? Here’s an example.

Example 3

Alex has $100,000 of earned income from his job and contributes $5,500 to an IRA in his name. Angie works part-time and has earned income of $3,000 for the year. Alex puts an additional $5,500 into an IRA on Angie’s behalf. On their joint federal tax return, Angie and Alex took a deduction for $11,000 of IRA contributions.

If they happen to file their Iowa tax return separately, the IRA deduction will need allocated between Alex and Angie. Angie will claim a deduction up to her earned income of $3,000. Alex will claim the remaining $8,000 of deductions.

(Note: from a practical standpoint, Alex and Angie would almost certainly file a joint Iowa tax return rather than separate returns if these were the only transactions they had during the year; however, they might file separately if Angie had enough unearned income [interest, dividends, etc.] during the year.)

In the next post, we’ll dive into the deduction Iowa allows for health insurance premiums paid with after-tax dollars.