Iowa Taxes on Pensions and Social Security
by: Upper Midwest Pension Rights Project
Question: My husband and I are Iowa residents and plan to retire next year. He will be 67 and I will be 65. We will each have income from a small pension and Social Security. Will we have to pay Iowa income tax on our pension and Social Security income?
ANSWER The short answer is you may have to pay some Iowa Income Tax next year. This will depend on the total amount of your pension and Social Security income. But even if you do, those taxes should be going down in the future. This is because Iowa has made several recent changes to how it taxes Social Security income and the income of senior citizens generally. And these changes should reduce taxes.
Pension Income. Iowa law excludes certain amounts of pension income for Iowans who are 55 years of age or older or disabled, as well as for the surviving spouse of such persons. Specifically, the first $6,000 in pension income for an individual and $12,000 for a married couple is excluded. Depending on your tax rate, this could save you and your husband over $1,000 each year.
Social Security. Iowa tax on your Social Security benefits is a mix of good news and bad news. First, the bad news. If one-half of your Social Security benefits plus all your other income (including tax-exempt interest) is more than $32,000 for a couple or $25,000 for a single person, then some of your Social Security will be taxed. In the past, up to 50% of your Social Security could be taxed under this rule. The good news is that beginning in 2007, you will not have to pay Iowa Income Tax on more than 34% of your Social Security benefits. Better yet, Iowa Income Taxes on Social Security are being slowly phased out. By the year 2014, Iowans will not have to pay any Iowa income taxes on Social Security benefits. This will lower or eliminate Iowa Income Taxes for many Iowans.
Filing Thresholds for Seniors. Beginning with the 2007 tax year, Iowans over 65 who are married, a head of household or a surviving spouse will be exempt from Iowa income tax if their net income is below $24,000. Other Iowans over 65 will be exempt if their net income is below $18,000. Beginning with the 2009 tax year, these amounts will increase to $32,000 for married, head of household and surviving spouses and $24,000 for others. This new rule will eliminate Iowa Income Taxes for many seniors.
Iowa Income Taxes are becoming much more friendly to Iowa seniors. Iowa tax laws, however, are complex. If you have questions about federal and state income taxes, you should contact your tax advisor. Iowans who need help with pension issues can obtain free legal help from the Upper Midwest Pension Rights Project, which is partially funded by the Retirement Research Foundation, the U.S. Administration on Aging and Iowa Legal Aid. You can contact the Project at 800-992-8161.
| The information in this article was not intended or written to be used and cannot be used to avoid penalties under the Internal Revenue Code. |
|
