Governor Kim Reynolds approved House File 2317 on March 1, 2022. Part VI of the bill specifies that for tax years starting on or after January 1, 2023, retirement income will not be included in the Iowa taxable income of qualified taxpayers. Here is an overview of the alterations:

To qualify for the retirement income exclusion, the taxpayer must be one of the following:

• 55 years of age or older on December 31^st of the tax year
• Disabled
• A surviving spouse or a survivor having an insurable interest in an individual who has qualified for the exclusion in the tax year based on age or disability. A survivor other than the surviving spouse is considered to have an “insurable interest” if the survivor is a son, daughter, mother, or father of the annuitant or pensioner.

For married couples, the retirement income exclusion is only applicable to a spouse who meets one of the above conditions. If one spouse does not meet one of the above conditions, retirement income attributable to that spouse is not eligible for the exclusion. If both spouses meet one of the above conditions, the taxpayers may exclude all eligible retirement income.

What retirement income qualifies for the exclusion?

The exclusion for retirement income includes “pensions or retirement plans from the government or other sources, such as defined benefit or defined contribution plans, annuities, individual retirement accounts, employer-sponsored plans, self-employed plans, and deferred compensation plans, as well as any earnings related to deferred compensation plans.”

Currently, the Department is developing administrative regulations to clarify which retirement plans are eligible for retirement income exclusion. At this stage, the Department has identified the following plans as qualifying for the exclusion:

• Distributions from individual retirement plans (IRA) authorized under section 408 of the Internal Revenue Code (IRC)
• Distributions from a simplified employee pension (SEP) plan
• Distributions from a savings incentive match plan for employees (SIMPLE) retirement plan
• Distributions from a Keogh plan
• Distributions from qualified pension plans as described in Treasury Regulation section 1.401-1(b)(1)(i), including IPERS
• Roth conversion income
• Distributions from qualified deferred compensation plans governed by the Employee Retirement Income Securities Act (ERISA) including a 401(k), 403(b), and 457(b) plan
• Annuity distributions pursuant to IRC section 402(a).
• Distributions from an Employee Stock Ownership Plan (ESOP) as defined in section 4975(e)(7) of the IRC

I am a retirement plan administrator. Am I required to withhold Iowa income tax on retirement income?

Governor Kim Reynolds authorized Senate File 181 on February 20, 2023. Part III of this bill revises Iowa Code section 422.16 to specify that Iowa income tax withholding is not necessary for retirement income distributions that are not subject to Iowa state income tax. As a result, administrators of qualifying plans are not obliged to withhold Iowa tax on distributions to eligible recipients.

In cases where a recipient is ineligible for retirement income exclusion, the plan administrator must withhold Iowa state income tax from the payments. The withholding can be calculated using the tables and formulas found on the Department’s Withholding Tax Information page, or alternatively, the plan administrator can withhold Iowa state income tax at a flat rate of 5 percent on these payments.

Iowa income tax was incorrectly withheld on retirement income from a qualifying plan to a qualified recipient in 2023. What should I do?

Individuals who are eligible for the retirement income exclusion and suspect that tax on their retirement income is being wrongly withheld should contact their plan administrator to claim a refund for any erroneously withheld Iowa state income tax and to ask the administrator to cease withholding Iowa state income tax on forthcoming payments. The plan administrator may ask the individual to fill out a new IA W-4P form to claim exemption from withholding.

If any amounts were accurately withheld or were erroneously withheld but not reported to the plan administrator in 2023, these amounts must be declared on your 2023 Iowa state income tax return. If the amount withheld exceeds your Iowa state income tax liability, you may be eligible for a refund.

If plan administrators become aware that they have mistakenly withheld Iowa state income tax on eligible retirement income in 2023, they must return the excess amount to the recipient by the end of 2023. The administrators have two choices:

• Refund the over withheld amount directly to the recipient and obtain a written receipt showing the date and amount of the repayment from the recipient. The plan administrator may then file an amended withholding tax return and request a refund of tax paid that was not due.

• Apply the over withheld amount against future tax required to be withheld on distributions to the recipient in the calendar year, if any. If the recipient does not have any income from the plan administrator subject to Iowa income tax, the plan administrator must use the first option.

If the withheld amounts were not incorrect, or if the plan administrator discovers the mistake in 2024, they should file a 1099-R form with the Department and provide the taxpayer with a 1099-R form that reports the amount withheld in 2023. The taxpayer should submit their 2023 Iowa state income tax return as usual, reporting the amount withheld, and claim a refund.

We encourage you to consult a tax professional regarding your personal situation. This article is provided for informational purposes only and should not be construed as tax advice.