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.
(This presentation is broken into a series of “Issues.” Today’s post covers Issues 1, 2 and 3.)
Today’s post will focus on a couple of filing basics, as well as how to account for basic things such as W-2 income.
Issue 1: Use the correct columns
For taxpayers filing separately on a combined return, one spouse will use column A and one spouse will use column B.
For taxpayers filing jointly, they’ll put everything in column A. And for taxpayers filing separately on separate returns, each spouse will use Column A on his or her separate return.
Issue 2: Dependents
Spouses can decide between themselves who claims any dependents on the tax Iowa tax return. As with federal returns, only that spouse can claim the tax benefits associated with that dependent (such as the $40 exemption credit, or the tuition & textbook credit for K-12 expenses).
One item of note: if there are expenses related to that dependent that may be deductible as an adjustment to income, the deduction must be allocated between the spouses based on net income. That’s Issue 10, coming in a future post.
Related question: What if the spouses also filed separate federal returns? Must the spouse who claimed the dependent on the federal return also claim the dependent on the Iowa return?
Answer: I have searched through Iowa guidance and law, and can find nothing which shows this is a requirement. It appears the dependents could be allocated differently on the Iowa return than on the federal return.
Issue 3: Items of Income (Lines 1-15 of the Iowa 1040)
Items of income are reported by the spouse earning the income, or divided 50//50 depending on the circumstances. Examples:
- Wage income from W-2s is reported by the spouse earning the income
- Interest and dividends: if one spouse has 100% ownership of the account, that spouse reports 100% of the income; if it’s a joint account, the spouses will split the income 50/50 on the Iowa tax return.
So far, this is all straightforward and not too mind-blowing. But stay tuned, it gets worse! In the next part, we’ll dive into dealing with capital-loss allocations, and dealing with deductions for IRA contributions.