Iowa Tax Reform and Rate Reductions

Updated as of March 7, 2022

Iowa Governor Kim Reynolds signed House File 2317 into law on March 1, 2022, enacting major tax reform. The bill includes many changes including lowering personal tax rates, exempting certain retirement income, modifying capital gain exclusions, adjustments to the research activities credit and provisions that allow for potential corporate tax rate reductions.

Highlights of these changes can be found below. Feel free to reach out to your MHCS team if you have questions about these changes and how they may impact you specifically.

Personal Income Tax Rates
The legislation phases down the personal tax rates from 8.53% to 3.9% by the year 2026 and replaces the nine tax brackets with one flat rate. The tables below illustrate the tax rate phase down starting in 2023.

Single Filers

Married Joint Filers

Tax Year 2023

$0 - $6,000

$0 - $12,000

4.40%

$6,001 - $30,000

$12,001 - $60,000

4.82%

$30,001 - $75,000

$60,001-$150,000

5.70%

Over $75,000

Over $150,000

6.00%


Single Filers


Married Joint Filers


Tax Year 2024

$0 - $6,000

$0 - $12,000

4.40%

$6,001 - $30,000

$12,001 - $60,000

4.82%

Over $30,000

Over $60,000

5.70%


Single Filers


Married Joint Filers


Tax Year 2025

$0 - $6,000

$0 - $12,000

4.40%

Over $6,000

Over $12,000

4.82%

Starting in 2026, the rate will be a flat 3.9% for all filers.


Retirement Income Changes
Retirement Income Exclusion
Effective January 1, 2023, Iowa will exclude certain retirement income from taxation for Iowans that are age 55 and older or disabled. Generally, income from governmental or other pension or retirement plan, including defined benefit or defined contribution plans, annuities, individual retirement accounts, plans maintained or contributed to by an employer, or maintained or contributed to by a self-employed person as an employer, and deferred compensation plans, or any earning attributed to the deferred compensation plans.

Retired Farmer Lease Exclusion
The legislation also provides a benefit for eligible individuals that are leasing farmland. Effective January 1, 2023, eligible Iowa retired farmers can elect to exclude income received from a farm tenancy agreement on property the farmer owned for 10 years or longer. This exclusion applies to all years following the initial year the election is made.

Eligible Individual means an individual who is disabled or who is fifty-five years of age or older at the time the election is made, who no longer materially participates in a farming business at the time the election is made, and who, as an owner-lessor, is party to a farm tenancy agreement.

A farm tenancy agreement includes cash leases, crop share leases or livestock share leases. Net income from a farm tenancy agreement earned, received, or reported by an entity taxed as a partnership for federal tax purposes, an S corporation, or a trust or estate is not eligible for the election and deduction, even if such net income ultimately passes through to an eligible individual.

An individual who elects this exemption is not eligible to claim a capital gain exclusion discussed later if the property is eventually sold.


Capital Gain Exclusions
Employee Owned Stock Sales
The bill provides employee-owners to make an irrevocable lifetime election to exclude the net capital gain from the sale or exchange of capital stock of one qualified corporation that was acquired during employment with the corporation.

To qualify, the corporation must have employed individuals in Iowa for at least ten years and the corporation must have had at least five shareholders for the ten years prior to the first sale of stock. At least two of the shareholders must not be related during the ten years prior to the first sale of stock to qualify.

The election applies to all sales or exchanges of qualifying stock within fifteen years of the election. The deduction phases in as follows: 33% exclusion in 2023, 66% exclusion in 2024, and 100% exclusion in 2025 and after.

Retired Farmer Capital Gain Exclusion
Effective January 1, 2023, retired farmers have the option to make a onetime, lifetime election to exclude net capital gains from the sale of farm related property. The bill describes qualifying property to include real property and certain livestock.

The qualifying farmer must be disabled or fifty-five years or older and previously materially participated in the farming business for a minimum of ten years. The property being sold must have been previously used in the farming business for a minimum of ten years to qualify for the exclusion.


Corporate Tax Rates
Currently, the top corporate tax rate schedule is:

The new legislation allows a reduction in the corporate tax rate if the state collects $700 million of corporate tax receipts beginning with the tax year 2023. The Iowa Department of Revenue will calculate the corporate tax rate annually until the corporate tax rate is lowered to a single rate of 5.50%.

If the state fails to collect $700 million in corporate receipts, there will be no adjustment to the corporate tax rate.


Tax Credits & Incentives
The legislation has created various rule changes to the research activities credit beginning in 2023. Starting in 2023, the alternative simplified credit must be used to calculate the eligible credit if the federal credit was calculated using the alternative simplified credit methodology.

There are also new restrictions on the refundable portion of the research activities credit that phase in overtime and eventually capping the maximum refund at 75% of the credit with tax years beginning on or after January 1, 2027.

In addition to the research activities credit, the following credits will have limitations on the refundable portion. The amount eligible for refund will phase down and be capped at 75% for tax years beginning on or after January 1, 2027.