What Is Iowa Alternate Tax?

Image courtesy of user Nemo on Pixabay.com
Image courtesy of user Nemo on Pixabay.com

What is the Iowa “alternate tax”? The short answer is, it’s an alternative tax calculation that may reduce the amount of Iowa tax owed by certain taxpayers.

Note that the alternate tax is different from “alternative minimum tax.” Iowa has an AMT too, but it’s something totally different from the alternate tax.

How Does Alternate Tax Work?

There are multiple steps involved in the calculation.

  1. Complete your Iowa 1040 through Line 38 to arrive at taxable income
  2. Find your Iowa net income (Line 26) and to that, add: any pension exclusion taken, as well as the amount of reportable Social Security benefits received*. (*-Iowa no longer taxes Social Security benefits, but you do have to include some or all of those benefits in the alternate tax calculation.)
  3. From the result on step 2, subtract either $13,500 if under age 65, or $32,500 if 65 or older
  4. Multiply that result by 8.98%. This is your “alternate tax.”
  5. Calculate the tax on your regular taxable income (step 1) using the regular tax tables
  6. Whichever result from step 5 or step 6 is smaller is the tax you owe.

Who Really Benefits?

While theoretically anyone could benefit from the alternate tax calculation, generally it’s a benefit to people over age 65. And in practice, I only have a handful of clients each year (even if over age 65) who actually benefit from the alternate tax.

For more information, including detailed examples, visit this page on the Iowa Department of Revenue website.