What are “Step 4 Reportable Social Security Benefits” On the Iowa Tax Return?

On the Iowa Form 1040, you’ll see a line titled “Step 4 Reportable Social Security Benefits.” What is this?

Background

Iowa does not tax Social Security benefits. However, those benefits ARE included in several calculations such as:

1. Whether the taxpayer needs to file a tax return,
2. Computing “Iowa alternate tax.” (NOTE: as I wrote about here, this is NOT “alternative minimum tax,” it’s the “alternate tax,” which is a totally different concept from AMT.)

So even though Social Security is not taxable in Iowa, a person filing an Iowa tax return still needs to compute the amount of “reportable” Social Security benefits so these calculations can be run.

Calculating Iowa Reportable Social Security Benefits

Hold on tight, because as with most things with Iowa taxes, there are calculations here that will make your eyes glaze over.

1. Start by taking total Social Security benefits received and divide by 2 (put another way, start with 1/2 of your total Social Security benefits).
2. Add in all your other income from lines 7-21 of your federal tax return, including tax-exempt interest.
3. Subtract adjustments to AGI from lines 23-32 of your federal tax return.
4. If you filed your federal tax return as married filing jointly, you subtract $32,000 from the sum of item 3; married filing separately on the federal return subtracts $0; all other filing statuses subtract $25,000
5. The next step is to take 1/2 of whatever item 4 came to
6. The reportable benefits on the Iowa return are the lesser of item 1 or item 5

This is similar to — but of course (because it’s Iowa) different from — the federal calculation of taxable Social Security benefits.

Since this can be confusing, let’s walk through an example.

Angie and Alex are married and file a joint federal tax return. Angie receives $25,000 in Social Security benefits. Alex is still working and has wages of $40,000. Angie also cashed out an IRA for $78,000. They have nothing else happening on the front side of their federal 1040.

1. 1/2 of Angie’s SS benefits is $12,500.
2. Income on lines 7-21 of the federal return is $118,000 (the 40K of wages plus 78K IRA withdrawal)
3. They have no adjustments on lines 23-36 of their federal 1040), so their total for this step is $118,000
4. Since they file a joint federal return, they subtract $32,000 from $118,000 = $86,000
5. 1/2 of item 4 is $43,000
6. The lesser of item 1 or item 5 is $12,500
7. Angie has $12,500 of reportable Social Security benefits to show on her Iowa tax return.