Iowa Admin. Code r. 701-40.80

Current through Register Vol. 47, No. 6, September 18, 2024

Rule 701-40.80 - Exemption for military retirement pay

For tax years beginning on or after January 1,2014, retirement pay received by taxpayers from the federal government for military service performed in the armed forces, armed forces reserves, or national guard is exempt from state income tax. In addition, amounts received by a surviving spouse, former spouse, or other beneficiary of a taxpayer who served in the armed forces, armed forces reserves, or national guard under the Survivor Benefit Plan are also exempt from state income tax for tax years beginning on or after January 1, 2014. The retirement pay is only deductible to the extent it is included in the taxpayer's federal adjusted gross income.

(1) Coordination with pension exclusion. The exclusion of retirement pay is in addition to the partial exclusion, provided in rule 701-4047. (422), of pensions and other retirement benefits for disabled individuals, individuals who are 55 years of age or older, surviving spouses and survivors. In addition, taxpayers who receive retirement pay under federal law that combines retirement pay for both uniformed service and the federal civil service retirement system or federal employees' retirement system must prorate the retirement pay based on years of service.

Example 1: A married individual who is 60 years of age receives $20,000 of federal retirement pay from military service and $30,000 in retirement pay from the Iowa public employees' retirement system during the 2014 tax year. The taxpayer can exclude $20,000 of military retirement pay and $12,000 as a pension exclusion under rule 701-4047. (422), for a total exclusion of $32,000 on the taxpayer's Iowa individual income tax return for the 2014 tax year.

Example 2: A single taxpayer who is 65 years of age receives $60,000 as a federal pension during the 2014 tax year. The taxpayer has 20 years of military service and 27 years of civilian employment with the federal government. The military retirement pay portion is $25,532 (20 years divided by 47 years multiplied by $60,000). The taxpayer can exclude $25,532 of military retirement pay and $6,000 as a pension exclusion under rule 701-4047. (422), for a total exclusion of $31,532 on the taxpayer's Iowa individual income tax return for the 2014 tax year.

(2) Coordination with filing threshold and alternate tax. The military retirement pay is excluded from the calculation of income used to determine whether an Iowa income tax return is required to be filed pursuant to 701-subrules 39.1(1) and 39.5(10) through 39.5(13). In addition, the military retirement pay is excluded from the calculation of the special tax computation for all low-income taxpayers except single taxpayers pursuant to rule 701-399. (422) and is excluded from the calculation of the special tax computation for taxpayers who are 65 years of age or older under rule 701-3915. (422).

(3) Iowa withholding. The amount of military retirement pay is excluded from the calculation of payments used to determine whether Iowa tax should be withheld from pension and annuity payments as determined pursuant to 701-subrule 46.3(4).

This rule is intended to implement Iowa Code sections 4225. and 422.7 as amended by 2014 Iowa Acts, Senate File 303.

Iowa Admin. Code r. 701-40.80

Adopted by IAB October 15, 2014/Volume XXXVII, Number 8, effective 11/19/2014