If you retire in Iowa, you may be subject to state income tax at rates that range from 0.36% up to 8.98%. But you may be able to claim an exclusion of all or a portion of your retirement income, and take advantage of certain other Iowa state tax deductions.
Social security and railroad retirement
Railroad retirement benefits are not taxable in Iowa and state income tax on Social Security benefits is being gradually phased out. The phase-out percentage for 2010 is 55% and will gradually increase to 100% by 2014.
If you are retired on total and permanent disability prior to reaching your employer’s retirement age, you can claim a deduction for your disability income. You can deduct your actual disability pay or $100 a week, whichever is less.
Other retirement income
You may be able to exclude a portion of retirement benefits such as pensions, annuities, and distributions from a self-employed retirement plan or IRA. To qualify, you must be 55 or older, or disabled, or the surviving spouse or survivor of someone who would have qualified. You can exclude up to $6,000 if you file as single, head-of-household, or qualifying widow(er), and up to $12,000 if you are married filing a joint, combined, or separate return.
Interest and dividends on government obligations
Interest income from state and municipal obligations outside Iowa is subject to Iowa state income tax. This includes dividends from mutual funds that invest in state and municipal bonds outside Iowa. But interest from municipal bonds or other obligations in Iowa is exempt.
Interest on federal government obligations such as U.S. savings bonds, or Treasury bills or notes that you included on your federal return are not subject to state income tax in Iowa. This includes income from mutual funds that invest in U.S. government obligations. But interest you receive on bonds from the Government National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mort¬gage Corporation (Freddie Mac), and Federal Agricultural Mortgage Corporation (Farmer Mac) is subject to Iowa state income tax.
You may be able to exclude 100% of certain capital gains for Iowa state income tax purposes. This exclusion does not apply to sales of stocks, bonds, and investment property. But if you sold real property you used in a business, or sold the business itself, you can exclude the capital gain if you materially participated in the business for 10 years and held the property for at least 10 years. Gains on the sale of breeding stock you held for 12 months also qualify for the exclusion if at least 50% of your gross income is from farming or ranching, or the sale of timber held for more than one year.
Health insurance deduction
In Iowa you can claim a tax deduction for 100% of the amount you pay for health and dental insurance premiums, including Medicare B supplemental medical insurance, Medicare D voluntary prescription drug insurance, and long-term nursing home coverage.
Deduction for caring for a disabled relative
If you itemize deductions, you can claim a deduction for up to $5,000 for your expenses in caring for a disabled grandparent, parent, child, or grandchild in your home. Deductible expenses include food, clothing, medical expenses, and transportation expenses for medical reasons.
Iowa IA1040 Forms and Instructions – Iowa Department of Revenue
Taxes by State – Iowa – Retirement Living Information Center