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Gov. Reynolds signs most historic tax reform bill in Iowa history.

On March 1, 2022, Governor Reynolds signed into law Iowa’s most significant tax reform bill in state history, establishing a 3.9% flat income tax rate, eliminating state tax on retirement income, reforming corporate income tax and more. 

When Governor Reynolds took office, Iowa had the sixth highest individual income tax rate in the nation. Now that the Governor's plan proposed this year has passed with bipartisan support, Iowa's income tax rate will be fourth lowest among all states that charge income tax, ranking among the most tax-friendly states in America. 

Thanks to the administration’s strong, conservative budgeting practices and fiscal responsibility, Iowa is in a formidable economic position. Last fiscal year, Iowa closed its books with a general fund balance of $1.24 billion and nearly $1 billion in cash reserves. 

There's never been a better time in Iowa for bold, sustainable tax reform that meets the priorities of the state, allows Iowans to keep more of what they earn, and creates a highly competitive tax system. 

  • 3.9% individual income tax rate. 

  • Elimination of retirement income tax. 

  • Exemption of net capital gains on sale of employee-awarded capital stock. 

  • Reduction of corporate income tax rate. 

A flat and fair 3.9% individual income tax rate means Iowans keep more of their hard-earned pay upfront. When the new rate is fully enacted in 2026, 98% of Iowa taxpayers with $10,000 or more of taxable income will benefit from a decreased tax liability. 

3.9% Flat Income Tax 

  • Beginning in tax year 2023, implement four tax brackets ranging from 4.4% to 6.0%. 

  • In subsequent tax years, eliminate the top rate annually until a 3.9% flat tax rate is achieved in tax year 2026. 

  • A 3.9% flat tax is projected to save Iowa taxpayers more than $1.67 billion by tax year 2026. 

A flat tax will not result in low-income Iowans paying more. Low to moderate-income earners who qualify for the Federal Earned Income Tax Credit (EIC) and other available tax credits will continue to receive a state tax refund when credits exceed state tax liability. 

Iowans who’ve worked hard, saved for retirement, and paid their fair share in taxes deserve a break to enjoy what they’ve earned. 

Retirement Income Exemption 

  • Beginning in tax year 2023, Iowans age 55 and older are exempt from state tax on retirement income earned from individual retirement account (IRA) distributions, taxable pensions and annuities. 

  • An estimated 294,624 Iowa taxpayers will see their retirement tax liability eliminated in 2023. 

Farmer Retirement Income Exemption 

  • Beginning in tax year 2023, Iowa farmers age 55 and older who farmed for at least 10 years but have retired from farming operations, can elect an exemption of income from either cash rent or farm crop shares for all years the income is earned; or elect one, lifetime election to exclude the net capital gains from the sale of farmland. 

Iowans who are awarded capital stock from their employers currently pay all or some of the net capital gains taxes on those shares when they choose to sell them. 

  • Allow one lifetime election to exclude the net capital gains from one stock of one qualified corporate or employee stock ownership plan (ESOP) from state income tax.
  • Qualified corporations must have done business in Iowa for a minimum of 10 years. Employee owners must have acquired capital stock while employed by the corporation for at least 10 years.
  • Under current law, 50% of net capital gains from an ESOP is allowed for deduction. The proposal would allow 100% of the net capital gains to be deducted.

Corporate tax levels directly affect economic activity in states, and those with more competitive structures and rates are in much better positions to grow existing businesses and attract new ones. Just a few years ago, Iowa’s rate was the highest in the country, but recent reforms have improved our national standing. Through continued common sense, pro-business strategies, Iowa can maximize its competitive advantage by offering businesses an opportunity to reduce their tax rate when they increase their revenue in Iowa.

  • For every fiscal year in which net corporate income tax receipts exceed $700 million, the surplus will be used to buy down the current top rate.
  • Following the close of the fiscal year, the Department of Revenue will determine the new top corporate income tax rate and apply it effective January 1 of the following tax year.
  • New top rates will be determined each fiscal year that net corporate income tax receipts exceed $700 million, until a uniform 5.5% corporate income tax rate is achieved, at which time it would be capped.
  • Once the rate is capped, excess tax revenue beyond $700 million will go into the state’s general fund.
  • Additionally, reforming refundable corporate tax credits will save Iowans $50 million by 2027.