Image courtesy of user Nemo on Pixabay.com

Image courtesy of user Nemo on Pixabay.com

Form 126 is an Iowa income tax form used by non-residents and part-year residents to allocate income between Iowa sources and non-Iowa sources.

Mechanics

Iowa taxation of non-residents and part-year residents goes like this:

  1. The non-resident or part-year resident fills out their Iowa Form 1040 as if they were a full-year resident. This includes calculating the full amount of tax that would be owed if they were full-year residents.
  2. The non-resident or part-year resident then allocates their income — using Form 126 — between Iowa sources and non-Iowa sources. Form 126 results in arriving at a percentage of income that is NOT Iowa source. That percentage is then multiplied by the amount of tax from step 1, to arrive at a tax credit amount.
  3. The credit calculated in step 2 is subtracted from the full tax amount calculated in step 1, to arrive at the actual Iowa tax liability for the year.
  4. The credit in step 2 is non-refundable, meaning it can’t result in a refund being paid. It can reduce the amount of tax owed down to $0, but no lower than that.

Example

Annie lives in Nebraska but owns an interest in an Iowa business. The amount of income from this investment is $10,000.

Annie’s income from Nebraska sources is $90,000. Her total income for the year is $100,000.

Annie will file her Iowa tax return by:

  1. Filling out the Iowa Form 1040 as if she were a full-year Iowa resident. She’ll calculate the amount of tax owed as if she were a full-year resident.
  2. Filling out Form 126 to allocate her income to Iowa and non-Iowa sources. In this case, 90% of her income is non-Iowa source.
  3. Annie will take her total tax liability from step 1 and multiply it by 90% to arrive at her tax credit amount.
  4. Taking the total tax liability minus the credit amount will give Annie her actual Iowa tax liability for the year.

“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.”