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.
Iowa taxation of non-residents and part-year residents goes like this:
- 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.
- 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.
- 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.
- 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.
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:
- 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.
- 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.
- Annie will take her total tax liability from step 1 and multiply it by 90% to arrive at her tax credit amount.
- Taking the total tax liability minus the credit amount will give Annie her actual Iowa tax liability for the year.