Iowa Form 130 is used by Iowa residents who pay tax on income to both Iowa and another state. Here are some examples of how it works.
Form 130 Example
Let’s say Alex lives in Council Bluffs, Iowa, but he works across the river in Omaha, Nebraska. Alex will pay tax to Nebraska because he works there, but he’ll also pay taxes to Iowa.
Let’s say he makes $50,000 of wages, has $5,000 of federal taxes withheld, and received an $800 federal refund on last year’s federal tax return. He has $3,000 of Nebraska taxes withheld on his wages.
(Note: for the sake of simplicity since not all 2019 numbers and tax tables are available yet, we are using 2018 as the tax year in these examples. Also we are assuming Alex claims the standard deduction everywhere.)
Iowa Side
For his Iowa return, Alex will: claim the $50,000 of wages, subtract out $5,000 of federal taxes withheld, and add back the $800 federal refund, leaving him with a bottom line of $45,800. He’ll also subtract out his standard deduction of $2,030, leaving him with taxable income of 43,770, and a tax liability on that of $2,262. He gets a $40 exemption, leaving him with a net tax balance of $2,222 on his Iowa return before any credit for tax paid to Nebraska is accounted for.
Nebraska Side
Next we need to account for the fact that Alex is filing a Nebraska tax return. For the sake of simplicity let’s assume the $50,000 is the only thing he has, so 100% of his income is Nebraska source. His tax would be $50,000 minus $6,750 Nebraska standard deduction equals $43,250. The tax on that is $2,083. He gets a $134 exemption, dropping his tax liability to $1,949. He’ll file his Nebraska return and get a $51 refund (because he had $2,000 of tax withheld).
Back to Iowa
Since 100% of his gross income is taxed by Nebraska, he can claim the lesser of: his Iowa tax as a credit, or the tax owed to Nebraska as a credit. He owes $2,222 to Iowa, and $1,943 to Nebraska, so $1,943 is his credit. This is calculated on Iowa Form 130.
The $1,943 tax credit is subtracted from $2,222, leaving him with a net tax liability in Iowa of $279. Presumably this is the amount he would owe Iowa since it is doubtful he had any Iowa tax withheld on his wages (since they were earned in Nebraska).
Note that the amount to use is his actual tax liability to Nebraska ($1,943) NOT the amount of Nebraska tax withheld. Also note that the $143 exemption IS subtracted because it is a non-refundable credit.
Fast Fact About Foreign Taxes
Did you know: if you pay foreign tax on, say, mutual fund investments, you might be able to claim a credit on the Form 130?
Let’s say Alex has $500 of dividends in addition to his $50,000 of wages, and all of those dividends are foreign-source, with $50 of foreign tax paid. His credit for foreign taxes would be: $500 / $50,500 = .99%; ,99% x $500 = $5.