Does Iowa Tax Retirement Income and Social Security?

Iowa’s approach to taxing income for retirees has undergone significant changes, making it important for residents to understand the current landscape. The state has specific rules that apply to various forms of retirement funds and Social Security benefits. These provisions directly impact the net income available to retirees living in the state.

The Iowa Retirement Income Exclusion

Effective for the 2023 tax year, Iowa allows for a complete deduction of eligible retirement income for individuals who are 55 years of age or older. This exclusion is also available to individuals who are disabled or are the surviving spouse of someone who would have qualified.

The scope of this exclusion is broad. To claim this benefit, taxpayers report the exclusion on their Iowa income tax return, the IA 1040 form. Eligible income sources include:

• Distributions from traditional and Roth IRAs
• Payments from 401(k) and 403(b) plans
• Pension payouts
• Income from defined benefit and defined contribution plans
• Annuities
• Deferred compensation plans such as 457s

This means a retiree aged 55 or over with income from these sources pays no state income tax on that money. For example, if an individual receives $40,000 from a pension and $50,000 from an IRA withdrawal, the entire $90,000 is excluded from their Iowa taxable income.

Taxation of Social Security Benefits

Iowa does not impose a tax on Social Security benefits, regardless of a taxpayer’s income level. This rule applies to all forms of Social Security, including retirement, disability, and survivor benefits. All federally recognized Social Security income is exempt from Iowa’s state income tax.

This state-level exemption stands in contrast to federal tax law. At the federal level, a portion of Social Security benefits can become taxable once a person’s “combined income” exceeds certain thresholds. For those whose income surpasses the federal base amounts, up to 85% of their Social Security benefits can be subject to federal income tax.

Because of the complete Iowa exemption, residents do not need to perform the complex federal calculations to determine their state tax liability on this income. All Social Security income is excluded when filing an Iowa return.

Other Iowa-Specific Retirement Tax Considerations

Retirees who begin receiving distributions before reaching age 55 find this income is subject to Iowa income tax. The retirement income exclusion does not apply to these individuals unless they qualify due to a disability. Early distributions from 401(k)s or IRAs are therefore included in Iowa taxable income.

A separate provision benefits military retirees. Iowa law provides a full tax exemption for military retirement pay, and this benefit is not contingent on age. A military veteran receiving a pension can exclude that income from their Iowa tax return even if they are younger than 55.

Iowa residents are taxed on their worldwide income, including retirement funds from out-of-state sources. A pension earned while working in another state is taxable in Iowa if the recipient is an Iowa resident. However, this out-of-state retirement income is also eligible for the age 55 and older exclusion.