Federal income taxes paid or accrued during the tax year are
a permissible deduction for Iowa income tax purposes, adjusted by any federal
refunds received or accrued during the tax year. Taxpayers who are not on an
accrual basis of accounting shall deduct their federal income taxes in the year
paid.
(1)
Federal income tax
deduction. The federal income tax deduction for cash basis taxpayers
equals the sum of the following:
a. The entire
amount of federal income tax withheld during the taxable year from compensation
of the taxpayer. Where a husband and wife file separate returns or separately
on a combined Iowa return, the actual federal income tax withheld from wages
earned by either spouse or both spouses must be deducted by each in accordance
with wage statement(s) and may not be prorated between the spouses.
b. Tax paid at any time during the taxable
year on a filing of federal estimated tax or on any amendment to such filing.
Where a husband and wife file separate Iowa returns or separately on a combined
Iowa return, the federal estimated tax payments made in the tax year shall be
prorated between the spouses by the ratio of each spouse's income not subject
to withholding to the total income not subject to withholding of both spouses,
including the federal estimated tax payment made in January of the tax year
which was made for the prior tax year. If an estimated tax payment or portion
of the payment is made for self-employment tax, then the spouse who has earned
the self-employment income shall report the amount of estimated tax designated
as self-employment tax. The federal tax deduction for the tax year does not
include the self-employment tax paid through the federal estimated payments
made in the tax year. In addition, the federal tax deduction does not include
the additional .9 percent Medicare tax computed under Section
3101(b)(2) of the Internal
Revenue Code for tax years beginning on or after January 1, 2013. However,
one-half of the self-employment tax paid in the tax year is deductible in
computing federal adjusted gross income pursuant to Section
164(f) of the Internal
Revenue Code, so this self-employment tax is also deductible in computing net
income. If an estimated tax payment or portion of the payment is made for the
federal net investment income tax computed under Section
1411 of the Internal Revenue Code for tax
years beginning on or after January 1, 2013, see paragraph
303.3(1)
"f" on how the federal net income tax should be
prorated between spouses.
c. Any
additional federal tax on a prior federal return paid during the taxable year.
Where a husband and wife file separately or separately on a combined Iowa
return, additional federal tax paid shall be prorated between the spouses by
the ratio of net income reported by each spouse to total net income of both
spouses in the year for which the additional federal tax was paid. If
additional federal tax paid includes federal self-employment tax, then that
amount of self-employment tax shall be deducted by the spouse who earned the
self-employment income. Any federal tax paid for a tax year in which an Iowa
individual income tax return was not required to be filed is not allowed as a
deduction in the year the federal taxes were paid. If additional federal tax
paid includes the federal net investment income tax computed under Section
1411 of the Internal Revenue Code for tax
years beginning on or after January 1, 2013, see paragraph
303.3(1)
"f" on how the federal net income tax should be
prorated between spouses.
EXAMPLE 1. Individual A earned $8,500 in income for the 2004
tax year and paid $200 in federal tax with the filing of the federal return in
2005. Individual A was not required to file an Iowa return for 2004 because the
Iowa net income was under $9,000. Individual A cannot claim a deduction for the
$200 in federal tax paid on the 2005 Iowa return because an Iowa return was not
required to be filed for the 2004 tax year.
EXAMPLE 2. Individual B moved into Iowa on January 1, 2005,
and filed an initial Iowa individual income tax return for the 2005 tax year.
Individual B paid $1,000 in additional federal income tax with the filing of
the 2004 federal income tax return in 2005. Individual B cannot claim a
deduction for the $1,000 in federal tax paid on the 2005 Iowa return because an
Iowa return was not filed for the 2004 tax year.
d. The earned income credit computed under
Section
32 of the Internal Revenue Code and the
additional child tax credit computed under Section
24(d) of the Internal
Revenue Code, to the extent that these credits reduce the federal income tax
liability on the prior federal return filed during the taxable year. Where a
husband and wife file separately or separately on a combined Iowa return, the
earned income credit and the additional child tax credit shall be prorated
between the spouses by the ratio of net income reported by each spouse to total
net income of both spouses in the year for which these credits were claimed.
EXAMPLE: Individual A filed a 2003 federal income tax return
reporting a tax liability of $2,000. Individual A had $500 of federal income
tax withheld and $2,500 of earned income credit. Individual A can deduct $500
as a federal income tax deduction on the Iowa return for 2003 and $1,500 as a
federal tax deduction on the Iowa return for 2004, since the federal tax
deduction is limited to the extent it reduced the federal income tax
liability.
e. The motor
vehicle fuel tax credit computed under Section
34 of the Internal Revenue Code for the
taxable year. Where a husband and wife file separately or separately on a
combined Iowa return, the motor vehicle fuel tax credit shall be prorated
between the spouses by the ratio of net income reported by each spouse to total
net income of both spouses in the year for which these credits were claimed.
EXAMPLE: Individual B filed a 2003 federal income tax return
reporting a tax liability of $1,500. Individual B paid $1,000 in federal
estimated tax during 2003 and claimed a $400 motor vehicle fuel tax credit on
the 2003 federal return. Individual B can deduct $1,400 as a federal income tax
deduction on the Iowa return for 2003.
f. For tax years beginning on or after
January 1, 2013, the federal net investment income tax, also known as the
unearned income Medicare contribution tax, computed under Section
1411 of the Internal Revenue Code. The
federal net investment income tax is computed on the lesser of net investment
income for the tax year or the excess of the modified adjusted gross income for
the tax year over a threshold amount.
Where a married couple file separate returns or separately on
a combined Iowa return, the federal net investment income tax, if computed on
net investment income, shall be prorated between the spouses by the ratio of
net investment income reported by each spouse to total net investment income of
both spouses in the year for which the federal net investment income tax was
paid. Where a married couple file separate returns or separately on a combined
Iowa return, the federal net investment income tax, if computed on the excess
of modified adjusted gross income over a threshold amount, shall be prorated
between the spouses by the ratio of net income reported by each spouse to total
net income of both spouses in the year for which the federal net investment
income tax was paid.
(2)
Federal income tax
refunds.
a. Any refund of federal
income tax received during the taxable year must be used to reduce the amount
deducted for federal income tax to the extent the refunded amount was deducted
on the Iowa return in a prior year. When a husband and wife file separately or
separately on a combined Iowa return, the federal income tax refund to be
reported shall be prorated between the spouses by the ratio of net income
reported by each spouse to total net income reported by both spouses. If an
amount of self-employment tax is required to be added back to Iowa net income,
then the spouse who earned the self-employment income which generated the
self-employment tax shall report that amount as an addition to net income. Any
federal tax refund received for a tax year in which an Iowa individual income
tax return was not required to be filed is not required to be reported in the
year the federal refund was received.
EXAMPLE 1: Individual A earned $7,500 in income for the 2004
tax year and had $1,000 in federal income tax withheld. Individual A received a
refund of the entire $1,000 federal tax withheld with the filing of the federal
return in 2005. Individual A was not required to file an Iowa return for 2004
because the Iowa net income was under $9,000. Individual A does not have to
report the $1,000 federal refund received on the 2005 Iowa return because an
Iowa return was not required to be filed for the 2004 tax year.
EXAMPLE 2: Individual B moved into Iowa on July 1, 2005, and
filed an initial Iowa individual income tax return for the 2005 tax year.
Individual B received a $2,000 federal income tax refund with the filing of the
2004 federal income tax return in 2005. Individual B does not have to report
the $2,000 federal refund on the 2005 Iowa return because an Iowa return was
not filed for the 2004 tax year.
b. Any portion of the federal refund received
due to the earned income credit computed under Section
32 of the Internal Revenue Code or the
additional child tax credit computed under Section
24(d) of the Internal
Revenue Code does not have to be reported on the Iowa return. However, any
portion of the federal refund received due to the motor vehicle fuel tax credit
computed under Section
34 of the Internal
Revenue Code does have to be reported on the Iowa return.
EXAMPLE 1: Individual A filed a 2003 federal income tax
return reporting a tax liability of $2,000. Individual A had $500 of federal
income tax withheld and $2,500 of earned income credit and received a federal
income tax refund of $1,000 after filing the return in 2004. Individual A does
not have to report the $1,000 federal refund on the Iowa return for 2004, since
the refund resulted from the earned income credit.
EXAMPLE 2: Individual B filed a 2003 federal income tax
return reporting a tax liability of $500. Individual B had $1,000 of federal
income tax withheld and $1,000 of earned income credit and received a federal
income tax refund of $1,500 after filing the return in 2004. Individual B must
report a $500 federal refund on the Iowa return for 2004, since the portion of
the refund relating to the earned income credit does not have to be
reported.
EXAMPLE 3: Individual C filed a 2003 federal income tax
return reporting a tax liability of $1,000. Individual C paid $900 in federal
estimated tax and claimed a $400 federal motor vehicle fuel tax credit and
received a federal refund of $300 after filing the return in 2004. Individual C
must report the $300 federal refund on the Iowa return for 2004, since the
refund resulted from the motor vehicle fuel tax credit.
c. Any portion of the federal refund received
due to the first-time homebuyer credit computed under Section
36 of the Internal Revenue Code does not have
to be reported on the Iowa return. Similarly, any recapture of the credit under
Section
36(f) of the Internal
Revenue Code is not allowed as a deduction for federal taxes paid.
EXAMPLE: Individual A filed a 2008 federal income tax return
reporting a tax liability of $1,000. Individual A had $1,200 of federal tax
withheld and $7,500 of first-time homebuyer credit and received a federal
income tax refund of $7,700 after filing the return in 2009. Individual A must
report a $200 federal refund on the Iowa return for 2009, since the portion of
the federal refund relating to the first-time homebuyer credit does not have to
be reported. The $500 of federal taxes that will be recaptured and paid for
each year on the federal income tax return for 2009-2023 in accordance with
Section 36(f) of the Internal
Revenue Code will not be allowed as a deduction on the Iowa return for federal
taxes paid.
(3)
Federal income tax deduction-part-year residents.
a. For tax years beginning on or before
December 31, 1981, the federal income tax deduction attributable to Iowa by
part-year residents shall be determined by multiplying the federal tax paid or
accrued for the entire taxable year by a fraction, the numerator of which is
the Iowa net income and the denominator of which is the federal adjusted gross
income except that the taxpayer can deduct actual federal income tax withheld
on that income subject to withholding which was earned while the taxpayer was
an Iowa resident if the federal tax withheld on the Iowa income is separately
shown on the wage statement(s) of the taxpayer.
b. For tax years beginning on or after
January 1, 1982, the federal income tax deduction attributable to Iowa by
part-year residents shall be the same deduction as is available for resident
taxpayers.
(4)
Federal income tax deduction-nonresidents.
a. For tax years beginning on or before
December 31, 1981, the federal income tax deduction attributable to Iowa by
nonresidents shall be determined by multiplying the federal tax paid or accrued
for the entire taxable year by a fraction, the numerator of which is the Iowa
net income and denominator of which is the federal adjusted gross income.
If separate Iowa nonresident returns are filed by a husband
and wife who filed a joint federal return, each spouse's Iowa adjusted gross
income must be divided by the total federal net income of both spouses in order
to compute a ratio that can be used to determine the federal tax deduction
attributable to each spouse. In any event, the ratio including the combined
ratio of husband and wife cannot exceed 100 percent.
Federal income taxes paid during the taxable year on prior
years' federal income tax returns will not be allowable on the nonresident
return for the taxable year unless Iowa returns were filed for the prior years
for which the federal taxes were paid.
Any federal income tax, either paid by a nonresident or
withheld from their compensation, which is later refunded to the taxpayer,
shall be included as Iowa income by the nonresident for the year the refund is
received, in the same portion that such federal tax was deducted by the
nonresident in a prior Iowa income tax return.
b. For tax years beginning on or after
January 1, 1982, the federal income tax deduction attributable to Iowa by
nonresidents of Iowa shall be the same deduction as is available for resident
taxpayers.
(7)
Federal
rebate received in 2008. For tax years beginning in the 2008 calendar
year, the federal tax rebate or advanced refund of federal income tax provided
to certain individuals in 2008 pursuant to the federal Economic Stimulus Act of
2008 is not to be included as part of an individual's federal income tax refund
for the individual's federal tax deduction for Iowa individual income tax
purposes.
EXAMPLE. Frank and Jane Casey received a federal refund of
$1,300 in March 2008 from federal income tax that had been deducted on their
2007 Iowa individual income tax return. Frank and Jane also received a $1,200
federal rebate in June 2008. When Frank and Jane file their 2008 Iowa return,
they must report a federal income tax refund of $1,300. However, they are not
required to include as part of the federal income tax refund shown on their
2008 Iowa return the $1,200 federal rebate they received in June
2008.
(8)
Federal
rate reduction credit and the federal income tax deduction for the 2009 tax
year. For tax years beginning in the 2009 calendar year, the tax
reduction credit or the advanced refund of federal income tax provided to
certain individuals pursuant to the federal Economic Stimulus Act of 2008 is to
be included as part of an individual's federal income tax refund for Iowa
individual income tax purposes. The tax reduction credit was also referred to
as the federal rebate when it was refunded to some taxpayers during the 2008
calendar year. This subrule does not apply to those taxpayers who received the
federal rebate in the 2008 calendar year.
EXAMPLE: When Fred and Barbara Jones completed their 2008
federal income tax return, they received the benefit of a rate reduction credit
of $1,200, which resulted in the Browns' receiving a federal income tax refund
of $1,300 in May 2009. Fred and Barbara need to report the entire $1,300 refund
of federal income tax when they complete their Iowa income tax return for
2009.
