The short answer to the question posed in the title is: yes.
Iowans who receive pension income from the military can exclude that income from taxation on their Iowa tax return.
The exclusion results in the military pension not being reported at all on the taxpayer’s Iowa tax return.
A question that arises from time-to-time is, what does the term “military” mean? For example, one of my clients is retired from the Coast Guard. Does his Coast Guard pension count toward the exclusion?
What Does “Military” Mean?
Here’s how the state defines the term “military:”
Retirement pay for military service in the United States Armed Forces, the Armed Forces Military Reserve, or the National Guard is eligible for exemption from Iowa income tax and is not included on line 9, without regard for age or disability. The Army, Navy, Air Force, Marine Corps, and Coast Guard make up the Armed Forces. Only military retirement pay received from the Defense Finance and Accounting Service (DFAS), or a similar source, is eligible for the exemption.
From the expanded instructions to the Iowa Form 1040, available on the Iowa Department of Revenue website.
So as you can see, Coast Guard pay counts.
Interaction Between the Military Retirement Exclusion and the Pension Exclusion
Iowa allows taxpayers over age 55 to exclude from taxation up to $6,000 for a single person or $12,000 for a married couple of pension and retirement-account income.
The military retirement exclusion is NOT a part of the pension exclusion. Here’s how the pension exclusion works:
- Pension income is reported as gross income
- The pension exclusion deduction is claimed
With military retirement income, the income is NOT REPORTED AT ALL on the Iowa tax return.
John is single, over age 55, and has $5,000 of military pension income, and $3,000 of income from a retirement account. On John’s tax return, he’ll show ONLY the $3,000 as pension income, and he’ll qualify for a $3,000 deduction for the pension exclusion. The $5,000 of military pension income IS NOT REPORTED AT ALL on his Iowa tax return.
“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.”