What Is Iowa State Tax? An Overview of Tax Types

Iowa collects various taxes to support public services and infrastructure, including education, public safety, transportation, and healthcare. Understanding the state’s tax framework provides clarity on how these services are sustained.

Iowa Individual Income Tax

Iowa imposes a tax on income earned by residents and non-residents deriving income from Iowa sources. The state is transitioning to a flat income tax rate. Beginning with the 2025 tax year, Iowa’s individual income tax rate is 3.8%. This change eliminates the previous progressive tax brackets, which varied based on income levels and filing status.

For the 2024 tax year, individuals faced a progressive structure where tax rates increased with higher income levels, ranging from 4.4% to 5.7%. Taxable income includes wages, salaries, interest, and dividends. Individuals can reduce their taxable income or tax liability through deductions, exemptions, and credits.

Iowa aligns with federal guidelines for deductions, such as the 2024 standard deduction of $14,600 for single filers. The state offers specific credits, including a percentage of the federal Earned Income Tax Credit (up to 15%) and a child or dependent care credit (up to 75%). A credit is also available for K-12 tuition and educational expenses, covering 25% of up to $2,000 in qualified expenses per child. Military pay received by a resident service member for active duty in a combat zone, if excluded from federal adjusted gross income, is exempt from Iowa income tax.

Iowa Sales and Use Tax

Iowa levies a sales tax on the retail sale of most goods, specified digital products, and certain services consumed within the state. The statewide sales tax rate is 6%. Many local jurisdictions also impose an additional local option sales tax, which can add up to 1% to the state rate, resulting in a combined sales tax that can reach 7%. Sellers apply this combined rate at the point of sale and are responsible for collecting and remitting the tax to the Iowa Department of Revenue.

The use tax complements the sales tax, applying to purchases made outside Iowa but intended for use within the state, where Iowa sales tax was not collected. This includes items bought from out-of-state retailers, such as online purchases, who do not have a physical or economic presence in Iowa sufficient to require sales tax collection. In such cases, the purchaser is responsible for directly remitting the use tax to the Iowa Department of Revenue. The use tax rate is the same as the state sales tax rate.

Certain items are exempt from Iowa sales and use tax. Common exemptions include most unprepared food items, prescription drugs, and medical equipment. Other exemptions cover agricultural supplies and machinery used directly in farming operations, and equipment used in manufacturing. Purchases by government entities and qualifying non-profit organizations for their exempt activities are also not subject to sales tax.

Iowa Property Tax

Property tax in Iowa is primarily a local tax, with revenues supporting counties, cities, school districts, and other local taxing authorities. This tax is levied on real property, including land, buildings, and other structures. While assessed and collected locally, the state establishes the legal framework, assessment guidelines, and offers various credits and exemptions that influence the final tax bill.

County and city assessors are responsible for valuing properties every two years, in odd-numbered years, to determine their market value. Agricultural property is assessed based on its productivity and earning capacity, rather than market value. The assessed value, after equalization and rollback limitations, forms the basis for applying local levy rates to calculate the property tax due.

Several state-level credits and exemptions can reduce an individual’s property tax liability. The Homestead Credit is available to qualifying homeowners who occupy their residence as a homestead on July 1 and for at least six months of the calendar year. This credit is based on the first $4,850 of the homestead’s actual value.

An exemption for homeowners aged 65 or older provides a reduction of $6,500 in taxable value for assessment years beginning on or after January 1, 2024. Honorably discharged veterans may also qualify for a Military Service Tax Exemption, which reduces the taxable value of their property, with the specific reduction amount varying. Applications for these benefits are filed with the city or county assessor by July 1.

Other Iowa State Taxes

Beyond individual income, sales, use, and property taxes, Iowa collects revenue through several other state-level taxes. The corporate income tax applies to the profits of businesses operating within the state.

Fuel taxes are levied on the sale of motor fuels like gasoline and diesel. For instance, the motor fuel excise tax rate for gasoline containing 15% ethanol or greater is set to increase to $0.265 per gallon effective July 1, 2025.

Excise taxes are imposed on specific goods and activities. Iowa levies an excise tax on cigarettes, currently set at $1.36 per 20-cigarette pack. Alcoholic beverages are also subject to excise taxes, with rates varying by product type, such as $0.19 per gallon for beer, $1.75 per gallon for wine, and $12.49 per gallon for liquor. These taxes are included in the retail price of the products.

A notable change in Iowa’s tax landscape concerns the inheritance tax. For deaths occurring on or after January 1, 2025, Iowa has completely abolished its inheritance tax. Prior to this, the tax was being phased out with annual reductions. This elimination means beneficiaries will no longer owe state tax on assets inherited from individuals who pass away in 2025 or later.