What Is Schedule IA 126 and How Do I File It?

Schedule IA 126, the Iowa Nonresident and Part-Year Resident Credit form, is a document used for state tax purposes. Its function is to calculate a tax credit that ensures individuals who do not live in Iowa for the full year are only taxed by the state on income derived from Iowa sources. The form works by first determining a tax amount as if the filer were a full-year resident and then applying a credit to reduce that tax.

Determining Filing Requirements and Iowa Source Income

Filing Schedule IA 126 is necessary for two specific groups: nonresidents and part-year residents of Iowa. A nonresident is an individual who did not live in Iowa at any time during the tax year but had income from Iowa sources. A part-year resident is someone who moved into or out of Iowa during the tax year, meaning they were a resident for only a portion of the year. Both groups must file this schedule if they have income attributable to Iowa and are required to file an Iowa income tax return, Form IA 1040.

For nonresidents, Iowa-source income includes:

• Wages or salaries earned for services performed within Iowa, even if payment was received outside the state.
• Income from a business, trade, or profession carried on within Iowa, such as profits from a sole proprietorship.
• Rental income from real or tangible personal property located in Iowa.
• Certain gambling winnings from Iowa establishments.
• Capital gains from the sale of property located in Iowa at the time of the sale.

For part-year residents, Iowa-source income includes all income earned from any source while they were living in the state, plus any Iowa-source income received during the period they were a nonresident.

Information Needed for Schedule IA 126

A completed federal income tax return, Form 1040, is the primary document needed. Specific figures from the federal return, such as total adjusted gross income (AGI) and total federal income tax, are required to complete the initial calculations on the Iowa return. Having the federal return finalized provides the “all sources” income figures that are a baseline for the schedule’s calculations.

You will also need all documents related to your Iowa-source income. This includes any Form W-2s that show wages earned in Iowa and Form 1099s for non-employee compensation for work performed in the state. If you have income from an Iowa-based business or rental property, you will need your profit and loss statements, partnership Schedule K-1s, or other business records that clearly delineate this income.

The form requires a separation of certain deductions between those attributable to Iowa and your total deductions. For example, adjustments to income, such as contributions to an IRA or self-employment tax deductions, must be prorated. Nonresidents often calculate the deductible portion based on the ratio of their Iowa earned income to their total earned income. Part-year residents will need records that show which deductions are tied to income earned while they lived in Iowa.

Step-by-Step Guide to Completing the Form

You will begin by transferring income and deduction figures to the schedule, with one column for “All Sources” (Column A) and another for “Iowa Sources” (Column B). The “All Sources” column will generally mirror the amounts from your federal return and the initial lines of your Iowa Form IA 1040.

After listing all income types and applicable deductions in both columns, you will arrive at a total net income for both all sources and Iowa sources. The form directs you to divide the Iowa-source net income by the all-source net income. This resulting percentage must be rounded to the nearest ten-thousandth of a percent (e.g., 12.3456%).

This Iowa income percentage is then used to determine the nonresident/part-year resident credit. The percentage is subtracted from 100% to find the non-Iowa income percentage. You will multiply this non-Iowa percentage by your preliminary Iowa tax liability, which was calculated on Form IA 1040 as if all your income were taxable by the state. The result of this multiplication is your tax credit.

The final calculated credit amount from Schedule IA 126 is then transferred to the main Iowa tax return, Form IA 1040, specifically to the line designated for the nonresident/part-year resident credit. A completed copy of Schedule IA 126, along with a copy of your federal tax return, must be attached to your filed Iowa tax return.