Beginning in 2023, Iowa families and businesses will pay lower taxes as a result of House File 2317 enacted during the 2022 legislative session.
The legislation included a reduction in personal income tax rates, a procedure to reduce corporate income tax rates and numerous other taxpayer-friendly changes.
Individual taxpayers will benefit by significantly amended personal income tax rates beginning Jan. 1. Prior to 2023, there were nine tax brackets with the highest marginal rate of 8.53%. Those brackets already were scheduled to be reduced from nine to four with a highest marginal tax rate of 6.5% in 2023. House File 2317 further reduces the rates and number of brackets during the next four tax years and schedules a phase-in of a flat 3.9% tax rate for all filers beginning for 2026 tax years and after.
On the corporate side, the legislation creates a system to reduce the corporate rate during a period of years, ultimately resulting in a single rate. In any year in which the state generates in excess of $700 million in corporate income tax receipts, the surplus will be used to buy down the current top rate.
Following the close of the fiscal year, the Department of Revenue will calculate the new top marginal tax and apply it effective Jan. 1 of that year. This calculation will take place at the conclusion of each fiscal year until the Iowa corporate income tax rate is lowered to a single rate of 5.50%.
For Fiscal Year 2022, Iowa net corporate income tax receipts exceeded $850 million, thus triggering the first corporate tax rate reduction. For tax year 2023, the previous scheduled rate of 9.8% is reduced to 8.4%.
Certain retirement income is nontaxable beginning in 2023. Disabled Iowans, or those age 55 and older, are able to exclude from taxable income certain retirement income received from a governmental or other pension or retirement plan, including defined benefit or defined contribution plans, annuities, individual retirement accounts, plans maintained or contributed to by an employer, or maintained or contributed to by a self-employed person as an employer, and deferred compensation plans or any earning attributed to the deferred compensation plans.
The categories of newly non-taxed retirement income are certain to benefit many Iowans, but the provisions are nuanced and should be reviewed carefully.
Also beginning in 2023, Iowans who are awarded capital stock from their employers can elect to exclude capital gains from the sale of such stock from state income tax. The qualified stock sale exclusion provides that an employee-owner is entitled to make one irrevocable lifetime election to exclude the net capital gain from the sale or exchange of capital stock of one qualified corporation if the capital stock was acquired by the employee-owner while employed and on account of employment by the corporation.
A qualified corporation must have employed individuals in the state for a minimum of 10 years and the employee-owner must have acquired the stock while employed by the corporation for at least 10 years. The deduction is phased-in during three years as follows: 33% in 2023, 66% in 2024 and 100% in 2025 and after.
Iowa income tax reform has resulted in significant taxpayer friendly changes in recent years. The changes mentioned above are just a few of the most noteworthy provisions. Many other changes are complex and require thorough analysis. Iowa taxpayers are encouraged to discuss these changes with their state and local tax professional.