Moving to Iowa

Iowa taxes its residents on everything they earn anywhere, and nonresidents on what they earn in Iowa, and the move-year return is built in an unusual way: the IA 1040 figures the tax on all of the year’s income as if you had lived in Iowa all year, and then IA 126 gives back the share that belongs to the months you lived elsewhere. The result is the same as taxing only the Iowa portion, but the mechanics confuse people, and so does the question of when you became a resident. Iowa counts you as a resident if you are domiciled here or keep a permanent home here, presumes it after 183 days in an Iowa home, and presumes domicile from an Iowa homestead claim, voter registration or driver’s license. Iowa has one wage agreement, with Illinois, and it covers wages only. For everything else there is a credit. And for a retiree the move decides whether a pension is taxed at all, since Iowa subtracts retirement income in full from age 55.

Who is a resident

Iowa Administrative Code 701-300.17 makes a person a resident on either of two grounds: being domiciled in Iowa, or maintaining a permanent place of abode in Iowa. Domicile is the place you intend as your permanent home; “every person has one and only one domicile,” and an Iowa domicile continues until you take positive steps to establish one elsewhere. Moving in means abandoning the old domicile, physically relocating, and intending to stay permanently or indefinitely. Moving out is harder to prove than moving in, because time away “does not alone show abandonment of an Iowa domicile.” A snowbird who keeps the Iowa house, the Iowa license and the Iowa voter registration and spends five months in Arizona is still an Iowa resident.

A permanent place of abode is a dwelling kept long enough to form a well-settled connection with the place. More than 183 days in Iowa combined with an Iowa abode creates a rebuttable presumption that you are a resident; the reverse presumption applies to someone who spends under 183 days in Iowa and 183 or more in a home in another state. Three facts presume domicile outright for anyone who keeps an Iowa residence: claiming the homestead credit or exemption on an Iowa home, registering to vote in Iowa, or holding an Iowa driver’s license. The rule also lists the ordinary tells: Iowa vehicle registration, an Iowa job or business, Iowa bank accounts, an Iowa address on tax and legal documents, immediate family in Iowa who depend on you. A part-year resident is someone who had no permanent abode in Iowa and was not domiciled here for the whole year; the day count plays no part in that status.

The part-year return: tax on everything, then a credit

A part-year resident files the ordinary IA 1040 and attaches IA 126. The IA 1040 is completed exactly as a full-year resident would: federal taxable income on line 2, the Schedule 1 modifications, Iowa tax at 3.8% on the whole year, the exemption credits. Then IA 126 computes the Iowa income percentage. Part I lists Iowa-source income by type: wages earned while an Iowa resident or from Iowa work, interest and dividends received while a resident, Iowa rents, business and farm income, Iowa unemployment, Iowa gambling winnings. Part II is all-source income. The adjustments to income come off both columns. Line 29 is Iowa net income divided by all-source net income, and line 30 is 100% minus that. The credit on line 34 is the Iowa tax after nonrefundable credits times line 30, and it goes to IA 1040 line 13. What remains is the Iowa share of the tax.

Because the tax is figured on the whole year, the federal standard deduction and every other below-the-line deduction are spread across the year in proportion to income, not assigned to the months in Iowa. A person who earned $20,000 before moving in and $60,000 after is taxed by Iowa on 75% of the tax on $80,000 less the deduction, not on $60,000 less a full deduction. For most movers the difference is small; for someone with a bonus, a severance or a sale on one side of the move it is not, and both years of the move are worth running before the date is chosen.

Part-year residents take the Iowa share of the refundable credits too: the Iowa earned income credit and the child care credit are each multiplied by the line 29 percentage. Nonresidents and part-year residents must file when Iowa-source net income on IA 126 line 27 is $1,000 or more, and in any case to recover Iowa withholding.

Which income is Iowa’s

Wages are sourced to where the work was done and, for a resident, to the period of residence. Interest, dividends and capital gains follow residence on the date received or realized: a stock sold in May by someone who moved to Iowa in July is not Iowa income, and one sold in September is. Rent and business income from Iowa property or an Iowa business is Iowa income whoever owns it. Pensions, IRA withdrawals and Social Security follow residence on the payment date, and for a resident 55 or older are then subtracted on Schedule 1 anyway. Iowa unemployment, Iowa lottery and casino winnings, and income from Iowa partnerships and S corporations on an IA K-1 are Iowa-source for everyone.

Illinois: wages only

Iowa’s only reciprocal agreement is with Illinois. Under it, wages and salaries are taxed by the state where the worker lives and not by the state where the work is done. The Department puts it directly: “Any wages or salary made by an Iowa resident working in Illinois is taxable only to Iowa and not to Illinois,” and the reverse for an Illinois resident working in Iowa. An Iowa resident working across the river gives the Illinois employer Form IL-W-5-NR, the Illinois statement of nonresidence, so that no Illinois tax is withheld, and gives the same employer an IA W-4 so that Iowa tax is. An Illinois resident working in Iowa gives the Iowa employer form IA 44-016, the Iowa statement of nonresidence, and the employer withholds Illinois tax instead. If the wrong state’s tax was withheld anyway, the fix is a nonresident return in that state to recover it and estimated payments or withholding in the home state.

The agreement stops at wages. “Iowa will tax any Iowa-source income received by an Illinois resident that is not from wages or salaries.” An Illinois resident’s winnings at an Iowa casino, Iowa unemployment compensation, rent from an Iowa duplex, and profit from a business operated in Iowa are all taxed by Iowa on an IA 1040 with IA 126. Self-employment income is not wages, so a consultant living in Illinois and working at an Iowa client’s office is taxed by Iowa on that work. The Quad Cities, Dubuque, Burlington, Keokuk and Clinton are where the agreement does its work, and where its wage-only limit catches people.

Every other state: the IA 130 credit

There is no agreement with Minnesota, Nebraska, South Dakota, Missouri or Wisconsin. An Iowa resident who works in Omaha, Rochester, La Crosse or Kansas City pays that state’s tax on the wages earned there and takes a credit on IA 130, reported on IA 1040 line 15. The credit is the lesser of the tax paid to the other state on the income or the Iowa tax on the same income, so it eliminates double taxation but never refunds the other state’s tax. The other state’s return is completed first. A resident of one of those states who works in Iowa files an Iowa nonresident return with IA 126 and takes whatever credit their own state gives.

Remote work across the line

Iowa taxes a nonresident on wages for work performed in Iowa, and only that. It has no convenience-of-the-employer rule, so a nonresident who works from home in another state for an Iowa company owes Iowa tax only on days physically worked in Iowa (verify). Count those days; the W-2 often reports all wages to the state of the office, and IA 126 then needs a day-count allocation. The reverse is simpler: an Iowa resident working from home in Iowa for an out-of-state employer is taxed by Iowa on all of it, with an IA 130 credit if the other state taxes it too. For an Iowa resident working remotely for an Illinois employer the agreement settles it: the wages are Iowa’s alone.

Retirement income in the year you move

Federal law since 1996 bars a state from taxing the retirement income of someone who no longer lives there, so the only state that can tax a pension or IRA withdrawal is the state of residence on the day it is paid. A retiree who moves to Iowa at 55 or older stops paying state income tax on retirement income the day they become an Iowa resident, because Iowa subtracts it in full on Schedule 1 line 7, and Social Security at any age on line 5. A retiree leaving Iowa for a state that taxes retirement income starts paying that state’s tax on the payments received after the move. The planning point is a Roth conversion: done in the Iowa years at 55 or older, it costs no state tax; done after a move to a taxing state, it does. See Iowa for retirees.

The school district surtax and the mover

Most Iowa school districts add a surtax of 0% to 20% of the Iowa tax, figured on IA 1040 line 19 by the district where you lived on December 31. A part-year resident who lives in Iowa on December 31 pays the surtax of that district on the Iowa share of the tax; one who left Iowa before December 31 pays no surtax at all. Two Iowans who swap houses across a district line in November swap surtax rates for the entire year.

The year you move: what to do

• Write down the date. The day you took up residence in Iowa, or gave it up, is the line that every allocation depends on, and the IA 126 asks for it.
• Change the IA W-4 or the other state’s withholding certificate with your employer in the month you move; a W-2 reporting the whole year to one state is the most common source of a wrong return.
• Moving to Iowa from Illinois, or the reverse, and keeping the job: file IL-W-5-NR or IA 44-016 with the employer so only the home state withholds.
• Moving in: apply for the homestead exemption with the county assessor by July 1 (and the 65-and-older exemption if it applies); get the Iowa license and register to vote. Moving out: cancel the homestead, surrender the license, re-register elsewhere.
• Note the school district you live in on December 31 and its surtax rate.
• If you will owe Iowa more than $1,000 after withholding, start estimated payments on the next Iowa date: April 30, June 30, September 30 or January 31.