Question: does Iowa recognize the Work Opportunity Credit?

Answer: no, but they do allow a deduction equal to the amount of credit claimed.

Analysis and Background

The Work Opportunity Tax Credit (WOTC) is a federal tax credit designed to reward employers for hiring people from certain targeted demographics. I went into more detail about the credit in this blog post.

Iowa does not recognize the WOTC; it’s only available on federal tax returns. However, all is not lost on your Iowa return.

How to Handle on the Iowa Return

On the federal tax return, the amount of WOTC claimed reduces the amount of deduction you can take for wages paid. For example, if you pay $20,000 of wages and qualify for a $2,000 WOTC, your deduction for wages paid is reduced to $18,000.

On your Iowa tax return, this “lost” deduction of $2,000 is allowed as an adjustment to income.

So, you don’t get a credit with Iowa, but you do get to take a deduction equal to the amount of WOTC claimed on the federal return.