On February 24, 2022, the Iowa legislature passed a tax reform bill, HF 2317. The bill was recently signed by the Governor on March 1, 2022, and includes important changes that will begin taking effect in 2023. Here are several key details included in the bill so that you can prepare your tax planning efforts to accommodate these changes.
- Capital gains from the sale of ESOP shares of qualified businesses to employee-owners will be eliminated. The change is effective beginning with the calendar year 2023, with 33.0% of any qualified capital gains being exempt for that year while 66.0% will be exempt for the calendar year 2024. Beginning with the calendar year 2025, qualified sales will be fully exempt from Iowa individual income tax.
- The income from farmland leased by retired farmers will be exempt from tax. The retired farmer must be 55 years of age or older and must have held the property for 10 years or more and materially participated in the farming business for 10 years or more. The exemption is effective starting January 1, 2023. The Beginning Farmer Tax Credit and this new exemption cannot be claimed at the same time.
- The capital gain income from farmland sold by retired farmers will be exempt from tax. The exemption will apply to sales of real property used in a farming business and the sale of cattle, horses, and breeding livestock. The exemption is effective starting January 1, 2023, and applies to sales consummated on or after that date. Taxpayers cannot use the farmland lease income exemption noted above and the capital gains exemption on the same property. The Beginning Farmer Tax Credit and this new exemption cannot be claimed at the same time.
- Iowa’s individual income tax rates will be reduced annually until falling to a flat rate of 3.9% for all taxpayers effective January 1, 2026. Currently, Iowa’s top rate is scheduled to drop to 6.5% in 2023, but that has changed. Here are the future tax brackets:
| MARRIED FILING JOINTLY | |||
| 2023 | 2024 | 2025 | |
| Taxable Income | Rate | Rate | Rate |
| $0 – $12,000 | 4.40% | 4.40% | 4.40% |
| $12,000 – $60,000 | 4.82% | 4.82% | 4.82% |
| $60,000 – $150,000 | 5.70% | 5.70% | 4.82% |
| $150,000 + | 6.00% | 5.70% | 4.82% |
| NOT MARRIED FILING JOINTLY | |||
| 2023 | 2024 | 2025 | |
| Taxable Income | Rate | Rate | Rate |
| $0 – $6,000 | 4.40% | 4.40% | 4.40% |
| $6,000 – $30,000 | 4.82% | 4.82% | 4.82% |
| $30,000 – $75,000 | 5.70% | 5.70% | 4.82% |
| $75,000 + | 6.00% | 5.70% | 4.82% |
- All retirement income will be exempt from individual income tax for disabled taxpayers and those aged 55 years or older. The exemption also applies to a deceased person’s retirement income that is received by a surviving spouse or person with an insurable interest in the deceased person. The changes are effective beginning January 1, 2023.
- The following changes are made to the research activities credit:
- Alternative simplified credit must be used for Iowa purposes if used for federal purposes.
- Supply costs as qualifying credit expenditures will be phased out over a period of time: 80% of supplies will be allowed in 2023, 60% of supplies will be allowed in 2024, 40% of supplies will be allowed in 2025, 20% of supplies will be allowed in 2026, and no supply costs will be allowed on or after January 1, 2027.
- The refundability of the tax credit will be reduced by ten percentage points each tax year through the tax year 2026. The first reduction would occur in the tax year 2023. This process will result in tax credit refundability equal to 50% for the tax year 2027 and after.
- Other tax credit changes
- Geothermal heat pump tax credit awards will not be issued after December 31, 2022.
- Endow Iowa tax credit received by a single individual will have their maximum tax credit dollar amount limited.
- There is going to be a process in place designed to reduce the Iowa corporate income tax rate over a number of years. The goal would be to get to a point whereby Iowa would have a single corporate rate of 5.5%. Currently, Iowa’s top rate is 9.8%.
If you have questions about how the above changes may impact your tax planning strategy, BerganKDV can help. Contact us and one of our professionals will be happy to assist you with your tax planning needs.
