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Iowa’s taxation of married couples has quirks that can throw a taxpayer or tax preparer for a loop. For example, Iowa has 3 different filing statuses a married couple can choose from, and most deduction items are allocated pro rata between spouses who file separately. This results in situations where “common sense” would say one thing but Iowa’s tax law says something else.

We’ll discuss these quirks in a series of blog posts over the coming months. These posts are excerpts from a CPE presentation I give to tax professionals on this topic.

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(This presentation is broken into a series of “Issues.” This is Issue 7.)

Iowa allows an exclusion of up to $12,000 of pension/retirement account income for taxpayers age 55 and older. When taxpayers file separate tax returns, the $12,000 exclusion might need to be allocated.

Let’s go through a few scenarios.

Scenario 1: Both spouses are over age 55 and both have pension income.

In this scenario, the $12,000 exclusion is allocated based on each spouse’s ratio of pension income. For example, if one spouse has pension income of $10,000 and the other has pension income of $5,000 (so combined they have $15,000 of pension income), the spouse with $10,000 of pension income will claim two-thirds of the exclusion; the spouse with $5,000 of pension income will claim one-third of the exclusion.

Scenario 2: Both spouses are over age 55 but only one of them has pension income

In this scenario, the spouse with the pension income will take the entire exclusion. Note that the exclusion is capped the lesser of: $12,000 or the actual amount of pension income. So if the spouse in this scenario had, say, $8,000 of pension income, they’d get an $8,000 pension exclusion.

Scenario 3: One spouse is over 55, the other under 55; spouse over age 55 has pension income

In this scenario, the couple still gets a $12,000 pension exclusion, which will be claimed by the spouse who’s over age 55.

Scenario 4: One spouse is over 55, the other under 55; the spouse under age 55 has pension income.

In this scenario, the couple doesn’t qualify for the exclusion because the spouse who’s under age 55 has pension income. This couple will get zero ($0) as a pension exclusion.

Scenario 5: One spouse is over age 55, the other under 55; the spouse under age 55 receives a retirement account distribution as an inheritance from a deceased relative who was older than age 55 at the time of death.

In this scenario, the taxpayers DO qualify for the exclusion, because the spouse who’s under age 55 received the income as a result of being a beneficiary of someone who met the “over age 55” requirements for the exclusion.

Scenario 6: One spouse is over 55, the other under 55; the “over 55” spouse has pension income of $8,000 while the “under 55” spouse has pension income of $5,000.

In this scenario, only the “over 55” spouse meets the exclusion requirements. They’ll claim an exclusion on their pension income ($8,000). The “under 55” spouse will claim their entire $5,000 of pension income as income and will not receive an exclusion.

Isn’t this fun???

Up next, we’ll discuss how to allocate the moving expense deduction, the deduction for tuition expenses, and deductions relating to dependents.

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”