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.” This is Issue 6.)
Iowa allows a deduction in full for health insurance premiums paid with AFTER-TAX* dollars. This deductions is available to everyone, even those who don’t itemize.
This is one place where Iowa law is similar to federal law in terms of how a deduction is allocated between spouses filing separate tax returns.
Taxpayers Without Self-Employment Income:
- If one spouse has wage income and the premiums are paid (WITH AFTER-TAX* DOLLARS ONLY!!!) out of that spouse’s wages, that spouse gets the deduction. This is a similar concept to federal law.
- If both spouses have wage income, and both spouses have insurance premiums paid (WITH AFTER-TAX* DOLLARS ONLY!!!) from their wages, each spouse will claim what was taken from their wages. Again, similar to federal law.
- If the premiums are paid outside of the taxpayers’ wages (as in a private policy), and one spouse makes the payment with separate funds, that spouse claims the deduction. This part is similar to federal law. But if the premiums are paid from a joint checking account, the deduction must be allocated based on the taxpayers’ net Iowa income.
Taxpayers with Self-Employment Income and Who Are Claiming the Self-Employed Health Insurance Deduction:
- If one spouse has self-employment income and the other doesn’t, the spouse with the SE income will claim the entire SE Health Insurance Deduction
- If both spouses have self-employment income, the deduction should be allocated based on the ratio of net SE income each spouse has. For example, if one spouse has $70,000 of SE income and one spouse has $30,000 of SE income, the spouse with $70,000 of SE income will claim 70% of the deduction.
* Note my constant emphasis on “after-tax dollars.” Most insurance premiums provided by a taxpayer’s employer will be paid out of wages on a pre-tax basis. For more information on the Iowa deduction for insurance premiums, read this article I wrote back in 2012.