What Was the Iowa Minimum Tax and Can I Get a Credit?
Iowa's alternative minimum tax was repealed, but you may still qualify for a credit on current tax returns if you paid this tax in prior years.
The Iowa alternative minimum tax (AMT) was a parallel tax system designed to ensure high-income taxpayers paid a minimum amount of tax, even after using numerous deductions. This tax was repealed for corporations for tax years starting on or after January 1, 2021, and for individuals for tax years starting on or after January 1, 2023.
The tax worked by adding back certain deductions allowed under the regular system, which created a different taxable income base. This alternative income was then subject to a flat tax rate. If the resulting minimum tax was higher than the regular tax liability, the taxpayer paid the higher amount.
Who Was Subject to the Minimum Tax
Before its repeal, the Iowa minimum tax affected individuals, corporations, estates, and trusts with high incomes and large deductions. For individuals, the likelihood of being subject to the AMT increased with the amount of specific tax preference items and adjustments claimed on their federal return. These were deductions and income types that received favorable treatment under the regular tax code but were disallowed for calculating the alternative minimum tax.
Common triggers for the individual AMT included claiming large deductions for state and local taxes, miscellaneous itemized deductions, or having long-term capital gains. The tax targeted those whose regular taxable income was not reflective of their actual economic income due to these benefits. Over time, more taxpayers could have become subject to the tax because its exemption amounts were not indexed for inflation.
Corporations could also face the Iowa AMT, particularly if they had large differences between their financial accounting income and their taxable income.
Calculating the Former Iowa Minimum Tax
Calculating the Iowa AMT was a multi-step process detailed on Form IA 6251. The starting point was the taxpayer’s Federal Alternative Minimum Taxable Income (AMTI), which is calculated on federal Form 6251 and already includes adjustments for various federal tax preference items.
From the federal AMTI, several Iowa-specific adjustments were required. A common adjustment was adding back the deduction claimed for state and local income taxes, as these were not deductible for Iowa tax purposes. Other adjustments could include income from certain Iowa-specific municipal bonds and other items that differed between federal and Iowa tax law.
After these adjustments, taxpayers could subtract an Iowa AMT exemption amount designed to shield lower and middle-income taxpayers from the tax. This exemption was phased out for taxpayers with AMTI above a certain threshold. The remaining income was then multiplied by a flat tax rate to determine the tentative minimum tax. If this amount exceeded the regular Iowa income tax liability, the difference was the Iowa AMT owed.
Claiming the Minimum Tax Credit
The Minimum Tax Credit was designed to compensate taxpayers for AMT paid on “deferral items,” which are tax preferences that create a timing difference between when an item is recognized for regular tax versus AMT. This credit was repealed and could be claimed for the last time on the 2023 tax return for AMT paid in 2022 or as a carryforward from prior years. The credit cannot be claimed for tax years beginning on or after January 1, 2024.
The credit’s purpose was to prevent double taxation. For example, a taxpayer might pay AMT on the exercise of an incentive stock option in one year. When the stock was later sold, the gain would be taxed for regular income tax purposes. The Minimum Tax Credit allowed the prior AMT payment to offset this future regular tax liability.